PRESCRIPTION DISTINGUISHED FROM LACHES

- Laches (estoppel by laches) – failure or neglect for an unreasonable and

unexplained length of time, to do that which, by exercising due diligence,
could or should have been done earlier, it is negligence or omission to
assert a right within a reasonable time, warranting a presumption that the
party entitled thereto either has abandoned it or declined to assert it.

PRESCRIPTION LACHES
Fact of delay Effect of delay
Question of inequity of permitting a
claim to be enforced, this inequity
Matter of time being founded on some change in
the condition of the property or the
relation of the parties
Statutory Not statutory
Applies at law Applies at equity
Based on a fixed time Not fixed time

SOURCES OF OBLIGATIONS

ARTICLE 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. (1089a)

 These sources are exclusive. No obligation exists if its source is not one
of those enumerated in Art. 1157 (Navales vs. Rias, 8Phil.508).

METROPOLITAN BANK & TRUST COMPANY vs. ANA GRACE ROSALES

AND YO YUK TO ( G.R. No. 183204, January 13, 2014)
Respondents Rosales filed before the Regional Trial Court (RTC) of Manila a
Complaint for Breach of Obligation and Contract with Damages against Petitioner
Metrobank. Respondents alleged that they attempted several times to withdraw
their deposits but were unable to because Metrobank had placed their accounts
under "Hold Out" status. No explanation, however, was given by petitioner as to
why it issued the "Hold Out" order. Thus, they prayed that the "Hold Out" order
be lifted and that they be allowed to withdraw their deposits. They likewise
prayed for actual, moral, and exemplary damages, as well as attorney’s fees.
Metrobank alleged that respondents have no cause of action because it has a
valid reason for issuing the "Hold Out" order. It averred that due to the fraudulent
scheme of respondent Rosales, it was compelled to reimburse Liu Chiu Fang the
amount of US$75,000.00 and to file a criminal complaint for Estafa against
respondent Rosales.
RULING:
In cases of breach of contract, moral damages may be recovered only if the
defendant acted fraudulently or in bad faith, or is “guilty of gross negligence

1
amounting to bad faith, or in wanton disregard of his contractual obligations.” In
this case, a review of the circumstances surrounding the issuance of the “Hold
Out” order reveals that Metrobank issued the “Hold Out” order in bad faith. First
of all, the order was issued without any legal basis. Second, Metrobank did not
inform respondents of the reason for the “Hold Out.” Third, the order was issued
prior to the filing of the criminal complaint. Records show that the “Hold Out”
order was issued on July 31, 2003, while the criminal complaint was filed only on
September 3, 2003. All these taken together lead us to conclude that Metrobank
acted in bad faith when it breached its contract with respondents. As we see it
then, respondents are entitled to moral damages.
The “Hold Out” clause applies only if there is a valid and existing obligation
arising from any of the sources of obligation enumerated in Article 1157 of the
Civil Code, to wit: law, contracts, quasi-contracts, delict, and quasi-delict. In this
case, Metrobank failed to show that respondents have an obligation to it under
any law, contract, quasi-contract, delict, or quasi-delict. And although a criminal
case was filed by Metrobank against respondent Rosales, this is not enough
reason for petitioner to issue a “Hold Out” order as the case is still pending and
no final judgment of conviction has been rendered against respondent Rosales.
In fact, it is significant to note that at the time Metrobank issued the “Hold Out”
order, the criminal complaint had not yet been filed. Thus, considering that
respondent Rosales is not liable under any of the five sources of obligation, there
was no legal basis for petitioner to issue the “Hold Out” order.

Quasi-contract as a Source of Obligation

– a juridical relation which arises from a lawful, voluntary and unilateral act or
acts executed by somebody for the benefit of another and for which the former
must be indemnified to the end that no one shall be enriched or benefited at the
expense of another (Art. 2142)
 Kind of contract created without the consent of one party but whose
missing consent is given by law.

 Characteristics of Quasi-Contracts:

1. Lawful acts
2. Voluntary acts
3. Unilateral acts

 2 principal kinds of Quasi-Contracts:

1. Negotiorum Gestio – Juridical relation which takes place when somebody

takes charge of the agency or management of the business or property of
another without any power from the latter. The owner of the business or
property shall reimburse the gestor for the necessary and useful expenses
incurred by the latter, and for the damages suffered by him in the
performance of his functions as gestor.

2. Solutio Indebiti – a juridical relation which takes place when somebody

received something from another without any right to demand for it, and
the thing was unduly delivered to him through mistake. (Art. 2154)

Distinguish Solutio Indebiti from Accion In Rem Verso

Accion in rem verso:

2
Art. 22. Every person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the expense of
the latter without just or legal ground, shall return the same to him.
- In solutio indebiti, payment was by mistake. In accion in rem verso, there was
no mistake.
Eg. Debt was already paid but debtor misplaced proof of payment. If pays
with reservation and later on finds the receipt, creditor has to return what he
received.

Delict or Act/Omissions Punished by Law as Source of Obligation

 Effect of death of the criminal pending trial on his civil liability

- Those arising from the crime are extinguished but if there

can be an independent civil action, civil liability is not extinguished, the
action will be directed against the administrator of the estate (fraud, physical
injuries, defamation)

PEOPLE OF THE PHILIPPINES vs. PARAS (G.R. No. 192912, October 03,
2014)

Under Article 89, paragraph 1 of the Revised Penal Code, as amended, the
death of an accused pending his appeal extinguishes both his criminal and civil
liability ex delicto. Said provision reads:

Art. 89. How criminal liability is totally extinguished. - Criminal liability is totally
extinguished:

1. By the death of the convict, as to the personal penalties; and as to pecuniary

penalties, liability therefore is extinguished only when the death of the offender
occurs before final judgment.

The Court, in People v. Bayotas, enunciated the following guidelines construing

the above provision in case the accused dies before final
judgment:chanRoblesvirtualLawlibrary

1. Death of the accused pending appeal of his conviction extinguishes his

criminal liability as well as the civil liability based solely thereon. As opined
by Justice Regalado, in this regard, "the death of the accused prior to final
judgment terminates his criminal liability and only the civil liability directly
arising from and based solely on the offense committed, i.e., civil liability
ex delicto in senso strictiore."

2. Corollarily, the claim for civil liability survives notwithstanding the death of
accused, if the same may also be predicated on a source of obligation other than
delict. Article 1157 of the Civil Code enumerates these other sources of
obligation from which the civil liability may arise as a result of the same act or
omission:

a) Law;
b) Contracts;
c) Quasi-contracts;
d) xxx;
e) Quasi-delicts

3
3. Where the civil liability survives, as explained in Number 2 above, an action for
recovery therefor may be pursued but only by way of filing a separate civil action
and subject to Section 1, Rule 111 of the 1985 Rules on Criminal Procedure as
amended. This separate civil action may be enforced either against the
executor/administrator or the estate of the accused, depending on the source of
obligation upon which the same is based as explained above.

4. Finally, the private offended party need not fear a forfeiture of his right to file
this separate civil action by prescription, in cases where during the prosecution of
the criminal action and prior to its extinction, the private-offended party instituted
together therewith the civil action. In such case, the statute of limitations on the
civil liability is deemed interrupted during the pendency of the criminal case,
conformably with provisions of Article 1155 of the Civil Code, that should thereby
avoid any apprehension on a possible privation of right by prescription.
(Citations omitted; emphasis ours.)

Thus, upon the death of the accused pending appeal of his conviction, the
criminal action is extinguished inasmuch as there is no longer a defendant to
stand as the accused; the civil action instituted therein for the recovery of civil
liability ex delicto is ipso facto extinguished, grounded as it is on the criminal
action.

In this case, when the accused-appellant died on January 24, 2013, his appeal to
this Court was still pending. The Decision dated June 4, 2014 was thereafter
promulgated as the Court was not immediately informed of the accused-
appellant's death.

The death of the accused-appellant herein, thus, extinguished his criminal

liability, as well as his civil liability directly arising from and based solely on the
crime committed.

BERNARDO vs. PEOPLE OF THE PHILIPPINES (G.R. No. 182210, October

05, 2015)

An act or omission causing damage to another may give rise to several distinct
civil liabilities on the part of the offender. If the conduct constitutes a felony, the
accused may be held civilly liable under Article 100 of the Revised Penal Code
(ex delicto). This particular civil liability due the offended party is rooted on facts
that constitute a crime. Otherwise stated, civil liability arises from the offense
charged. It is not required that the accused be convicted to be entitled to civil
liability based on delict. As long as the facts constituting the offense charged are
established by preponderance of evidence, civil liability may be awarded.
Moreover, the civil liability based on delict is deemed instituted with the criminal
action unless the offended party waives the civil action, reserves the right to
institute it separately, or institutes the civil action prior to the criminal action.

The same act or omission, however, may also give rise to independent civil
liabilities based on other sources of obligation. Article 1157 of the Civil Code
enumerates these other sources of obligation from which the civil liability may
arise as a result of the same act or omission: (a) law (b) contracts; (c) quasi-
contracts, and (d) quasi-delicts. Among these are the civil liabilities for intentional
torts under Articles 32 and 34 of the Civil Code and for quasi-delicts under Article
2176 of Civil Code. For conduct constituting defamation, fraud, and physical

4
injuries, the Civil Code likewise grants the offended party the right to institute a
civil action independently of the criminal action under Article-33 of the Civil Code.

Thus, it is entirely possible for one to be free from civil ability directly arising from
a violation of the penal law and to still be liable civilly based on contract or by
laws other than the criminal law. Such civil actions may proceed independently
of the criminal proceedings and regardless of the result of the criminal action,
subject however, to the caveat that the offended party cannot recover
damages twice for the same act or omission.

Bernardo's civil liability may be enforced in the present case despite her death.

As a general rule, the death of an accused pending appeal extinguishes her

criminal liability and the corresponding civil liability based solely on the offense
(delict). The death amounts to an acquittal of the accused based on the
constitutionally mandated presumption of innocence in her favor, which can be
overcome only by a finding of guilt - something that death prevents the court from
making. In a sense, death absolves the accused from any earthly
responsibility arising from the offense — a divine act that no human court can
reverse, qualify, much less disregard. The intervention of death of the accused in
any case is an injunction by fate itself so that no criminal liability and the
corresponding civil liability arising from the offense should be imposed on him. 37

The independent civil liabilities, however, survive death and an action for
recovery therefore may be generally pursued but only by filing a separate civil
action and subject to Section 1, Rule 111 of the Rules on Criminal Procedure as
amended. This separate civil action may be enforced against the estate of the
accused.

In B.P. 22 cases, the criminal action shall be deemed to include the

corresponding civil actions. Instead of instituting two separate cases, only a
single suit is filed and tried. This rule was enacted to help declog court dockets,
which had been packed with B.P. 22 because creditors used the courts as
collectors. As we observed in Hyatt v. Asia Dynamic Electrix Corp.:

Because ordinarily no filing fee is charged in criminal cases for actual damages,
the payee uses the intimidating effect of a criminal charge to collect his credit
gratis and sometimes, upon being paid, the trial court is not even informed
thereof. The inclusion of the civil action in the criminal case is expected to
significantly lower the number of cases filed before the courts for collection based
on dishonored checks. It is also expected to expedite the disposition of these
cases. Instead of instituting two separate cases, one for criminal and another for
civil, only a single suit shall be filed and tried. It should be stressed that the policy
laid down by the Rules is to discourage the separate filing of the civil action.ch

As a necessary consequence of this special rule, the civil liabilities arising from
the issuance of a worthless check are deemed instituted in a case for violation of
B.P. 22; the death of Bernardo did not automatically extinguish the action. The
independent civil liability based on contract, which was deemed instituted in the
criminal action for B.P. 22, may still be enforced against her estate in the present
case. We thus rule on the present action to determine Bumanglag's civil liability.

NCC, Art. 33. In cases of defamation, fraud, and physical injuries a civil action for
damages, entirely separate and distinct from the criminal action, may be brought
by the injured party. Such civil action shall proceed independently of the criminal
prosecution, and shall require only a preponderance of evidence.

5
  There are also crimes without civil liability. Examples are treason,
rebellion, gambling, etc.

Quasi-Delict Distinguished from Crime

Basis Quasi-Delict Crime

1. Legal basis of liability Fault or negligence Law clearly punishing the
act
2. Criminal intent Not essential Essential for criminal
liability
3. Nature of right violated Private right; against a Public right a wrong
private individual against the State
4. Liability for damages There is always liability Some crimes do not give
for damages rise to liability for
damages (eg. Contempt,
illegal possession of
firearms)
5. Proof needed Preponderance of Proof beyond reasonable
evidence doubt
6. Sanction or penalty Reparation or Imprisonment or fine or
indemnification of the both; accessory penalties
injury or damage like civil interdiction,
suspension, etc.

Quasi-Delict distinguished from Culpa-Contractual

Basis Quasi-Delict/Culpa Culpa Contractual
Aquiliana
1. Nature of negligence Negligence is direct, Negligence is merely
substantive and incidental to the
independent performance of the
contractual obligation
2. Defense of good father Complete and proper Not a complete and
of a family defense insofar as proper defense
parents, guardians,
employers are concerned
3. Presumption of No presumption of Negligence is presumed
negligence negligence. Plaintiff must once it is proved that
prove negligence of there is breach of
defendant. contract. Defendant
must prove that there
was no negligence.

 The creditor has a right to the fruits of the thing from the time the
obligation to deliver it arises. However, he shall acquire no real right over it
until the same has been delivered to him (Art. 1164).

Personal right – jus in personam or jus ad rem (a power demandable by

one person of another)

Real right – jus in re (a power over a specific thing and is binding on the
whole world)

6
KINDS OF DELIVERY
(a) Real or Actual Tradition
(b) Constructive Tradition
1. Tradicion Symbolica – eg. Keys to house
2. Tradicion Instrumental – execution of public instrument
3. Tradition Longa Manu – pointing of the object
4. Tradition Brevi Manu (possessor becomes owner, thus no more
actual delivery)
5. Tradicion Constitutum Possessorium (possessor/owner loses
ownership but retains possession in some other capacity, eg.
lessee)
6. Tradicion by operation of law – non-owner sells property and later
acquires owner
7. Quasi-Tradicion (Art. 1501)
Art. 1501. With respect to incorporeal property, the provisions of the
first paragraph of article 1498 shall govern. In any other case wherein
said provisions are not applicable, the placing of the titles of ownership
in the possession of the vendee or the use by the vendee of his rights,
with the vendor's consent, shall be understood as a delivery.

NORKIS vs. CA (193 SCRA 694)

The principal issue in this case is who should bear the loss of the motorcycle.
The answer to this question would depend on whether there had already been a
transfer of ownership of the motorcycle to private respondent at the time it was
destroyed.
Norkis concedes that there was no "actual" delivery of the vehicle. However, it
insists that there was constructive delivery of the unit upon: (1) the issuance of
the Sales Invoice in the name of the private respondent and the affixing of his
signature thereon; (2) the registration of the vehicle on November 6, 1979 with
the Land Transportation Commission in private respondent's name; and (3) the
issuance of official receipt for payment of registration fees.
That argument is not well taken. As pointed out by the private respondent, the
issuance of a sales invoice does not prove transfer of ownership of the thing sold
to the buyer. An invoice is nothing more than a detailed statement of the nature,
quantity and cost of the thing sold and has been considered not a bill of sale
(Am. Jur. 2nd Ed., Vol. 67, p. 378). In all forms of delivery, it is necessary that the
act of delivery whether constructive or actual, be coupled with the intention of
delivering the thing. The act, without the intention, is insufficient (De Leon,
Comments and Cases on Sales, 1978 Ed., citing Manresa, p. 94).
When the motorcycle was registered by Norkis in the name of private
respondent, Norkis did not intend yet to transfer the title or ownership to Nepales,
but only to facilitate the execution of a chattel mortgage in favor of the DBP for
the release of the buyer's motorcycle loan. The Letter of Guarantee issued by the
DBP, reveals that the execution in its favor of a chattel mortgage over the
purchased vehicle is a pre-requisite for the approval of the buyer's loan. If Norkis
would not accede to that arrangement, DBP would not approve private
respondent's loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting delivery, which
gives legal effect to the act, is the actual intention of the vendor to deliver, and its
acceptance by the vendee. Without that intention, there is no tradition (Abuan vs.
Garcia, 14 SCRA 759).

7
On March 20, 1980, before private respondent's loan was released and before he
even paid Norkis, the motorcycle had already figured in an accident while driven
by one Zacarias Payba. Payba was not shown by Norkis to be a representative
or relative of private respondent. The latter's supposed relative, who allegedly
took possession of the vehicle from Norkis did not explain how Payba got hold of
the vehicle on February 3, 1980. Norkis' claim that Julian Nepales was acting as
Alberto's agent when he allegedly took delivery of the motorcycle, is controverted
by the latter. Alberto denied having authorized Julian Nepales to get the
motorcycle from Norkis Distributors or to enter into any transaction with Norkis
relative to said motorcycle. These circumstances more than amply rebut the
disputable presumption of delivery upon which Norkis anchors its defense to
Nepales' action.

EQUATORIAL REALTY DEVELOPMENT, INC. vs. MAYFAIR THEATER, INC.,

(G.R. No. 133879, November 21, 2001)

Let us now apply the foregoing discussion to the present issue. From the peculiar
facts of this case, it is clear that petitioner never took actual control and
possession of the property sold, in view of respondent's timely objection to the
sale and the continued actual possession of the property. The objection took the
form of a court action impugning the sale which, as we know, was rescinded by a
judgment rendered by this Court in the mother case. It has been held that the
execution of a contract of sale as a form of constructive delivery is a legal fiction.
It holds true only when there is no impediment that may prevent the passing of
the property from the hands of the vendor into those of the vendee. When there
is such impediment, "fiction yields to reality — the delivery has not been
effected."
Hence, respondent's opposition to the transfer of the property by way of sale to
Equatorial was a legally sufficient impediment that effectively prevented the
passing of the property into the latter's hands.
This was the same impediment contemplated in Vda. de Sarmiento v. Lesaca, in
which the Court held as follows:
"The question that now arises is: Is there any stipulation in the sale in
question from which we can infer that the vendor did not intend to deliver
outright the possession of the lands to the vendee? We find none. On the
contrary, it can be clearly seen therein that the vendor intended to place
the vendee in actual possession of the lands immediately as can be
inferred from the stipulation that the vendee 'takes actual possession
thereof . . . with full rights to dispose, enjoy and make use thereof in such
manner and form as would be most advantageous to herself.' The
possession referred to in the contract evidently refers to actual possession
and not merely symbolical inferable from the mere execution of the
document.
"Has the vendor complied with this express commitment? she did not. As
provided in Article 1462, the thing sold shall be deemed delivered when
the vendee is placed in the control and possession thereof, which situation
does not here obtain because from the execution of the sale up to the
present the vendee was never able to take possession of the lands due to
the insistent refusal of Martin Deloso to surrender them claiming
ownership thereof. And although it is postulated in the same article that
the execution of a public document is equivalent to delivery, this legal
fiction only holds true when there is no impediment that may prevent the

8
 passing of the property from the hands of the vendor into those of the
vendee. x x x."31
The execution of a public instrument gives rise, therefore, only to a prima facie
presumption of delivery. Such presumption is destroyed when the instrument
itself expresses or implies that delivery was not intended; or when by other
means it is shown that such delivery was not effected, because a third person
was actually in possession of the thing. In the latter case, the sale cannot be
considered consummated.
However, the point may be raised that under Article 1164 of the Civil Code,
Equatorial as buyer acquired a right to the fruits of the thing sold from the time
the obligation to deliver the property to petitioner arose. That time arose upon
the perfection of the Contract of Sale on July 30, 1978, from which moment the
laws provide that the parties to a sale may reciprocally demand performance.
Does this mean that despite the judgment rescinding the sale, the right to the
fruits belonged to, and remained enforceable by, Equatorial?
Article 1385 of the Civil Code answers this question in the negative, because
"[r]escission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest; x x x" Not
only the land and building sold, but also the rental payments paid, if any, had to
be returned by the buyer.
Another point. The Decision in the mother case stated that "Equatorial x x x has
received rents" from Mayfair "during all the years that this controversy has been
litigated." The Separate Opinion of Justice Teodoro Padilla in the mother case
also said that Equatorial was "deriving rental income" from the disputed property.
Even herein ponente's Separate Concurring Opinion in the mother case
recognized these rentals. The question now is: Do all these statements concede
actual delivery?
The answer is "No." The fact that Mayfair paid rentals to Equatorial during the
litigation should not be interpreted to mean either actual delivery or ipso facto
recognition of Equatorial's title.
The CA Records of the mother case show that Equatorial — as alleged buyer of
the disputed properties and as alleged successor-in-interest of Carmelo's rights
as lessor — submitted two ejectment suits against Mayfair. Filed in the
Metropolitan Trial Court of Manila, the first was docketed as Civil Case No.
121570 on July 9, 1987; and the second, as Civil Case No. 131944 on May 28,
1990. Mayfair eventually won them both. However, to be able to maintain
physical possession of the premises while awaiting the outcome of the mother
case, it had no choice but to pay the rentals.
The rental payments made by Mayfair should not be construed as a recognition
of Equatorial as the new owner. They were made merely to avoid imminent
eviction. It is in this context that one should understand the aforequoted factual
statements in the ponencia in the mother case, as well as the Separate Opinion
of Mr. Justice Padilla and the Separate Concurring Opinion of the herein
ponente.
At bottom, it may be conceded that, theoretically, a rescissible contract is valid
until rescinded. However, this general principle is not decisive to the issue of
whether Equatorial ever acquired the right to collect rentals. What is decisive is
the civil law rule that ownership is acquired, not by mere agreement, but by
tradition or delivery. Under the factual environment of this controversy as found
by this Court in the mother case, Equatorial was never put in actual and effective
control or possession of the property because of Mayfair's timely objection.

9
In short, the sale to Equatorial may have been valid from inception, but it was
judicially rescinded before it could be consummated. Petitioner never acquired
ownership, not because the sale was void, as erroneously claimed by the trial
court, but because the sale was not consummated by a legally effective delivery
of the property sold.

FAJARDO, JR. vs. FREEDOM TO BUILD, INC. (G.R. No. 134692. August 1,
2000)
Freedom To Build, Incorporated, an owner-developer and seller of low-cost
housing, sold to petitioner-spouses, a house and lot designated Lot No. 33, Block
14, of the De la Costa Homes in Barangka, Marikina, Metro Manila. The Contract
to Sell executed between the parties, contained a Restrictive Covenant providing
certain prohibitions, to wit:
"Easements. For the good of the entire community, the
homeowner must observe a two-meter easement in front. No
structure of any kind (store, garage, bodega, etc.) may be built on
the front easement.
"x x x.............................x x x.............................x x x
"Upward expansion. A second storey is not prohibited. But the
second storey expansion must be placed above the back portion of
the house and should not extend forward beyond the apex of the
original building.
"x x x.............................x x x.............................x x x
"Front expansion: 2nd Storey: No unit may be extended in the
front beyond the line as designed and implemented by the
developer in the 60 sq. m. unit. In other words, the 2nd floor
expansion, in front, is 6 meters back from the front property line and
4 meters back from the front wall of the house, just as provided in
the 60 sq. m. units."
The above restrictions were also contained in Transfer Certificate of Title
No. N-115384 covering the lot issued in the name of petitioner-spouses.
The controversy arose when petitioners, despite repeated warnings from
respondent, extended the roof of their house to the property line and
expanded the second floor of their house to a point directly above the
original front wall. Respondent filed before the Regional Trial Court,
wherein the RTC ordered petitioners to immediately demolish and remove
the extension of their expanded housing unit that exceeds the limitations
imposed by the Restrictive Covenant, otherwise the Branch Sheriff of this
Court shall execute this decision at the expense of the defendants.
Petitioners argue that for lack of a specific provision, prescribing the
penalty of demolition in the "Restrictive Covenant" in the event of a breach
thereof, the order to demolish the structure should fail.
RULING:
This argument has no merit; Article 1168 of the New Civil Code states:
"When the obligation consists in not doing and the obligor does
what has been forbidden him, it shall be undone at his expense."

10
 This Court is not unaware of its ruling in Ayala Corporation vs. Ray Burton
Development Corporation, which has merely adjudged the payment of
damages in lieu of demolition. In the aforementioned case, however, the
elaborate mathematical formula for the determination of compensatory
damages which takes into account the current construction cost index
during the immediately preceding 5 years based on the weighted average
of wholesale price and wage indices of the National Census and Statistics
Office and the Bureau of Labor Statistics is explicitly provided for in the
Deed of Restrictions entered into by the parties. This unique and peculiar
circumstance, among other strong justifications therein mentioned, is not
extant in the case at bar.

WHEN SHALL THE OBLIGATION BE PERFORMED?

- Technically, upon demand
ARTICLE 1169. Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.

However, the demand by the creditor shall not be necessary in order that
delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it
appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered
it beyond his power to perform.

In reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent
upon him. From the moment one of the parties fulfills his obligation, delay by the
other begins.

 Art. 1169 talks about legal delay (default or mora).

 When does delay begin?

- As a general rule, delay begins upon demand, judicial or extrajudicial.

DEVELOPMENT BANK OF THE PHILIPPINES (DBP) vs. GUARIÑA

AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION ( G.R. No.
160758. January 15, 2014)

In July 1976, Guariña Corporation applied for a loan from DBP to finance the
development of its resort complex situated in Trapiche, Oton, Iloilo. On October
5, 1976, Guariña Corporation executed a real estate mortgage over several real
properties in favor of DBP as security for the repayment of the loan. On May 17,
1977, Guariña Corporation executed a chattel mortgage over the personal
properties existing at the resort complex and those yet to be acquired out of the
proceeds of the loan, also to secure the performance of the obligation. Prior to
the release of the loan, DBP required Guariña Corporation to put up a cash
equity of P1,470,951.00 for the construction of the buildings and other
improvements on the resort complex. The loan was released in several

11
instalments, and Guariña Corporation used the proceeds to defray the cost of
additional improvements in the resort complex. In all, the amount released
totalled P3,003,617.49, from which DBP withheld P148,102.98 as interest.
Guariña Corporation demanded the release of the balance of the loan, but DBP
refused. Instead, DBP directly paid some suppliers of Guariña Corporation over
the latter's objection. DBP found upon inspection of the resort project, its
developments and improvements that Guariña Corporation had not completed
the construction works. In a letter dated February 27, 1978, and a telegram
dated June 9, 1978, DBP thus demanded that Guariña Corporation expedite the
completion of the project, and warned that it would initiate foreclosure
proceedings should Guariña Corporation not do so. Unsatisfied with the non-
action and objection of Guariña Corporation, DBP initiated extrajudicial
foreclosure proceedings. A notice of foreclosure sale was sent to Guariña
Corporation. The notice was eventually published, leading the clients and patrons
of Guariña Corporation to think that its business operation had slowed down, and
that its resort had already closed.
DBP submits that the loan had been granted under its supervised credit financing
scheme for the development of a beach resort, and the releases of the proceeds
would be subject to conditions that included the verification of the progress of
works in the project to forestall diversion of the loan proceeds; and that under
Stipulation No. 26 of the mortgage contract, further loan releases would be
terminated and the account would be considered due and demandable in the
event of a deviation from the purpose of the loan, including the failure to put up
the required equity and the diversion of the loan proceeds to other purposes. It
assails the declaration by the CA that Guariña Corporation had not yet been in
default in its obligations despite violations of the terms of the mortgage contract
securing the promissory note.
Guariña Corporation counters that it did not violate the terms of the promissory
note and the mortgage contracts because DBP had fully collected the interest
notwithstanding that the principal obligation did not yet fall due and become
demandable.

RULING:
The submissions of DBP lack merit and substance.
The agreement between DBP and Guariña Corporation was a loan. Under the
law, a loan requires the delivery of money or any other consumable object by one
party to another who acquires ownership thereof, on the condition that the same
amount or quality shall be paid. Loan is a reciprocal obligation, as it arises from
the same cause where one party is the creditor, and the other the debtor. The
obligation of one party in a reciprocal obligation is dependent upon the obligation
of the other, and the performance should ideally be simultaneous. This means
that in a loan, the creditor should release the full loan amount and the debtor
repays it when it becomes due and demandable.
By its failure to release the proceeds of the loan in their entirety, DBP had no
right yet to exact on Guariña Corporation the latter's compliance with its own
obligation under the loan. Indeed, if a party in a reciprocal contract like a loan
does not perform its obligation, the other party cannot be obliged to perform what
is expected of it while the other's obligation remains unfulfilled. In other words,
the latter party does not incur delay.
Still, DBP called upon Guariña Corporation to make good on the construction
works pursuant to the acceleration clause written in the mortgage contract (i.e.,

12
Stipulation No. 26), or else it would foreclose the mortgages. DBP's actuations
were legally unfounded. It is true that loans are often secured by a mortgage
constituted on real or personal property to protect the creditor's interest in case of
the default of the debtor. By its nature, however, a mortgage remains an
accessory contract dependent on the principal obligation, such that enforcement
of the mortgage contract will depend on whether or not there has been a violation
of the principal obligation. While a creditor and a debtor could regulate the order
in which they should comply with their reciprocal obligations, it is presupposed
that in a loan the lender should perform its obligation - the release of the full loan
amount - before it could demand that the borrower repay the loaned amount. In
other words, Guariña Corporation would not incur in delay before DBP fully
performed its reciprocal obligation.
Considering that it had yet to release the entire proceeds of the loan, DBP could
not yet make an effective demand for payment upon Guariña Corporation to
perform its obligation under the loan. According to Development Bank of the
Philippines v. Licuanan, it would only be when a demand to pay had been made
and was subsequently refused that a borrower could be considered in default,
and the lender could obtain the right to collect the debt or to foreclose the
mortgage. Hence, Guariña Corporation would not be in default without the
demand.
Assuming that DBP could already exact from the latter its compliance with the
loan agreement, the letter dated February 27, 1978 that DBP sent would still not
be regarded as a demand to render Guariña Corporation in default under the
principal contract because DBP was only thereby requesting the latter "to put up
the deficiency in the value of improvements.” Under the circumstances, DBP's
foreclosure of the mortgage and the sale of the mortgaged properties at its
instance were premature, and, therefore, void and ineffectual.

VAZQUEZ VS. AYALA CORPORATION (G.R. NO. 149734, NOVEMBER 19,

2004)

The point of this petition is the alleged failure of Ayala Corporation to offer the
subject lots for sale to petitioners within three (3) years from the execution of the
MOA. It is not that Ayala Corporation committed or intended to develop the first
phase of its amended development plan within three (3) years. Whether it did or
did not is actually beside the point since the subject lots are not located in the
first phase anyway.
In order that the debtor may be in default it is necessary that the following
requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor
requires the performance judicially or extrajudicially.
Under Article 1193 of the Civil Code, obligations for whose fulfillment a day
certain has been fixed shall be demandable only when that day comes. However,
no such day certain was fixed in the MOA. Petitioners, therefore, cannot demand
performance after the three (3) year period fixed by the MOA for the development
of the first phase of the property since this is not the same period contemplated
for the development of the subject lots. Since the MOA does not specify a period
for the development of the subject lots, petitioners should have petitioned the
court to fix the period in accordance with Article 1197 of the Civil Code. As no
such action was filed by petitioners, their complaint for specific performance was
premature, the obligation not being demandable at that point. Accordingly, Ayala
Corporation cannot likewise be said to have delayed performance of the
obligation.

13
Even assuming that the MOA imposes an obligation on Ayala Corporation to
develop the subject lots within three (3) years from date thereof, Ayala
Corporation could still not be held to have been in delay since no demand was
made by petitioners for the performance of its obligation.
As found by the appellate court, petitioners' letters which dealt with the three (3)-
year timetable were all dated prior to April 23, 1984, the date when the period
was supposed to expire. In other words, the letters were sent before the
obligation could become legally demandable. Moreover, the letters were mere
reminders and not categorical demands to perform. More importantly, petitioners
waived the three (3)-year period as evidenced by their agent, Engr. Eduardo
Turla's letter to the effect that petitioners agreed that the three (3)-year period
should be counted from the termination of the case filed by Lancer. The letter
reads in part:
I. Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it was
undertaken by your goodselves to complete the development of Phase I
within three (3) years. Dr. & Mrs. Vazquez were made to understand that
you were unable to accomplish this because of legal problems with the
previous contractor. These legal problems were resolved as of February
19, 1987, and Dr. & Mrs. Vazquez therefore expect that the development
of Phase I will be completed by February 19, 1990, three years from the
settlement of the legal problems with the previous contractor. The reason
for this is, as you know, that security-wise, Dr. & Mrs. Vazquez have been
advised not to construct their residence till the surrounding area (which is
Phase I) is developed and occupied. They have been anxious to build
their residence for quite some time now, and would like to receive
assurance from your goodselves regarding this, in compliance with the
agreement.
II. Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr. &
Mrs. Vazquez to exercise their option to purchase the two lots on each
side (a total of 4 lots) adjacent to their "Retained Area". They are
concerned that although over a year has elapsed since the settlement of
the legal problems, you have not presented them with the size,
configuration, etc. of these lots. They would appreciate being provided
with these at your earliest convenience.
Manifestly, this letter expresses not only petitioners' acknowledgement that the
delay in the development of Phase I was due to the legal problems with GP
Construction, but also their acquiescence to the completion of the development
of Phase I at the much later date of February 19, 1990. More importantly, by no
stretch of semantic interpretation can it be construed as a categorical demand on
Ayala Corporation to offer the subject lots for sale to petitioners as the letter
merely articulates petitioners' desire to exercise their option to purchase the
subject lots and concern over the fact that they have not been provided with the
specifications of these lots.
The letters of petitioners' children, Juan Miguel and Victoria Vazquez, dated
January 23, 1984 and February 18, 1984 can also not be considered categorical
demands on Ayala Corporation to develop the first phase of the property within
the three (3)-year period much less to offer the subject lots for sale to petitioners.
The letter dated January 23, 1984 reads in part:

14
 You will understand our interest in the completion of the roads to our
property, since we cannot develop it till you have constructed the same.
Allow us to remind you of our Memorandum of Agreement, as per which
you committed to develop the roads to our property "as per the original
plans of the company", and that
1. The back portion should have been developed before the front portion –
which has not been the case.
2. The whole project – front and back portions be completed by 1984. 38
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our
Memorandum of Agreement which states respectively:…
Even petitioner Daniel Vazquez' letter dated March 5, 1984 does not make out a
categorical demand for Ayala Corporation to offer the subject lots for sale on or
before April 23, 1984. The letter reads in part:
…and that we expect from your goodselves compliance with our
Memorandum of Agreement, and a definite date as to when the road to
our property and the development of Phase I will be completed.
At best, petitioners' letters can only be construed as mere reminders which
cannot be considered demands for performance because it must appear that the
tolerance or benevolence of the creditor must have ended.

 NO DEMAND, NO DELAY. Exceptions:

(1) When the obligation expressly so declares;

(2) When the law expressly so declares;

Eg. Payment of taxes

(3) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the service is
to be rendered was a controlling motive for the establishment of the contract;

(4) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.

(5) When the debtor expressly admits that he has been in default.

- mere asking for extension is not an admission of default

 In case of doubt whether the debtor is in delay, doubt shall be resolved in

his favor. Reason: Because demand is essential and is the general rule.

UNIVERSITY OF MINDANAO, INC. vs. BANGKO SENTRAL PILIPINAS, ET

AL. (G.R. No. 194964-65, January 11, 2016)
The prescriptive period for actions on mortgages is ten (10) years from the day
they may be brought. Actions on mortgages may be brought not upon the
execution of the mortgage contract but upon default in payment of the obligation
secured by the mortgage.

A debtor is considered in default when he or she fails to pay the obligation on due
15
date and, subject to exceptions, after demands for payment were made by the
creditor. Article 1169 of the Civil Code provides:chanRoblesvirtualLawlibrary

ART. 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the fulfillment of
their obligation.

However, the demand by the creditor shall not be necessary in order that delay
may exist:chanRoblesvirtualLawlibrary

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to
be rendered was a controlling motive for the establishment of the contract; or

(3) When demand would be useless, as when the obligor has rendered it beyond
his power to perform.cralawlawlibrary

Article 1193 of the Civil'Code provides that an obligation is demandable only

upon due date. It provides:chanRoblesvirtualLawlibrary

ART. 1193. Obligations for whose fulfillment a day certain has been fixed, shall
be demandable only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon arrival
of the day certain.

A day certain is understood to be that which must necessarily come, although it

may not be known when.

If the uncertainty consists in whether the day will come or not, the obligation is
conditional, and it shall be regulated by the rules of the preceding
Section.cralawlawlibrary

In other words, as a general rule, a person defaults and prescriptive period for
action runs when (1) the obligation becomes due and demandable; and (2)
demand for payment has been made. The prescriptive period neither runs from
the date of the execution of a contract nor does the prescriptive period
necessarily run on the date when the loan becomes due and demandable.
Prescriptive period runs from the date of demand, subject to certain exceptions.

In other words, ten (10) years may lapse from the date of the execution of
contract, without barring a cause of action on the mortgage when there is a gap
between the period of execution of the contract and the due date or between the
due date and the demand date in cases when demand is necessary.

The prescriptive period for filing an action may run either (1) from 1990 when the
loan became due, if the obligation was covered by the exceptions under Article
1169 of the Civil Code; (2) or from 1999 when respondent demanded payment, if
the obligation was not covered by the exceptions under Article 1169 of the Civil
Code. In either case, respondent's Complaint with cause of action based on the
mortgage contract was filed well within the prescriptive period.

Given the termination of all traces of FISLAI's existence, demand may have been
rendered unnecessary under Article 1169(3) of the Civil Code. Granting that this

16
is the case, respondent would have had ten (10) years from due date in 1990 or
until 2000 to institute an action on the mortgage contract.

However, under Article 1155 of the Civil Code, prescription of actions may be
interrupted by (1) the filing of a court action; (2) a written extrajudicial demand;
and (3) the written acknowledgment of the debt by the debtor.

Therefore, the running of the prescriptive period was interrupted when

respondent sent its demand letter to petitioner on June 18, 1999. This eventually
led to petitioner's filing of its annulment of mortgage complaints before the
Regional Trial Courts of Iligan City and Cagayan De Oro City on July 16, 1999.
Assuming that demand was necessary, respondent's action was within the ten
(10)-year prescriptive period. Respondent demanded payment of the loans in
1999 and filed an action in the same year.

KINDS OF DEFAULT (MORA):

1. Mora Solvendi – default on the part of the debtor/obligor

Effects of Mora Solvendi: Obligor liable for
i. damages
ii. fortuitous event
iii. interest

2. Mora Accipiendi – default on the part of the creditor/obligee

Effects of Mora Accipiendi:
i. obligor in a crime is excused by fortuitous event
ii. obligee bears the loss by fortuitous event

SPS. NAMEAL AND LOURDES BONROSTRO vs. SPS. JUAN AND

CONSTACIA LUNA (G.R. No.172346, July 24, 2013)
The spouses Bonrostro want to be relieved from paying interest on the amount of
P214,492.62 which the spouses Luna paid to Bliss as amortizations by asserting
that they were prevented by the latter from fulfilling such obligation. They invoke
Art. 1186 of the Civil Code which provides that “the condition shall be deemed
fulfilled when the obligor voluntarily prevents its fulfillment.”
However, the Court finds Art. 1186 inapplicable to this case. The said provision
explicitly speaks of a situation where it is the obligor who voluntarily prevents
fulfillment of the condition. Here, Constancia is not the obligor but the obligee.
Moreover, even if this significant detail is to be ignored, the mere intention to
prevent the happening of the condition or the mere placing of ineffective
obstacles to its compliance, without actually preventing fulfillment is not sufficient
for the application of Art. 1186. Two requisites must concur for its application, to
wit: (1) intent to prevent fulfillment of the condition; and, (2) actual prevention of
compliance.
Tender of payment “is the manifestation by the debtor of a desire to comply with
or pay an obligation. If refused without just cause, the tender of payment will
discharge the debtor of the obligation to pay but only after a valid consignation of
the sum due shall have been made with the proper court.” “Consignation is the
deposit of the [proper amount with a judicial authority] in accordance with rules
prescribed by law, after the tender of payment has been refused or because of
circumstances which render direct payment to the creditor impossible or
inadvisable.”
“Tender of payment, without more, produces no effect.” “[T]o have the effect of
payment and the consequent extinguishment of the obligation to pay, the law
requires the companion acts of tender of payment and consignation.”

17
As to the effect of tender of payment on interest, noted civilist Arturo M. Tolentino
explained as follows:
When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a
prompt attempt of the debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will be suspended from the
date of such tender. But when the tender of payment is not accompanied by
the means of payment, and the debtor did not take any immediate step to
make a consignation, then interest is not suspended from the time of such
tender. x x x x (Emphasis supplied)

3. Compensatio Morae- default on the part of both debtor and creditor.

Effect of Compensation Morae:

Applies only in reciprocal obligations where performance of the parties must be
simultaneous. Here, the default of one party neutralizes the default of the other
and their respective liabilities shall be offset equitably.

SOLAR HARVEST INCORPORATED vs. DAVAO CORRUGATED CARTON

CORPORATION (G.R. No. 176686, July 26, 2010)
The right to rescind a contract arises once the other party defaults in the
performance of his obligation. In determining when default occurs, Article 1191
should be taken in conjunction with Article 1169 of the same law.
In reciprocal obligations, as in a contract of sale, the general rule is that the
fulfillment of the parties’ respective obligations should be simultaneous. Hence,
no demand is generally necessary because, once a party fulfills his obligation
and the other party does not fulfill his, the latter automatically incurs in delay. But
when different dates for performance of the obligations are fixed, the default for
each obligation must be determined by the rules given in the first paragraph of
Article 1169, that is, the other party would incur in delay only from the moment
the other party demands fulfillment of the former’s obligation. Thus, even in
reciprocal obligations, if the period for the fulfillment of the obligation is fixed,
demand upon the obligee is still necessary before the obligor can be considered
in default and before a cause of action for rescission will accrue.

PRICE STABILIZATION INC. vs. RELLORAZA, ET. AL. (97 Phil 153)
 If the debt is to be paid in installments, for example every month, there is a
need for a demand each month to place the debtor in default for every
monthly installment. Default in one installment does not place the debtor in
default for the others which are not yet due and no demand has been made.
 If there is an acceleration clause, a clause which states that nonpayment of
one installment makes the balance due and demandable, then nonpayment of
one installment makes all other installments due. However, demand is still
required to place the debtor in default.

WHEN WILL THE DEBTOR BE LIABLE FOR DAMAGES IN AN OBLIGATION?

Art. 1170. Those who in the performance of their obligations are guilty of:
1. Fraud;
2. Negligence;

18
3. Delay; and
4. Contravention of the tenor of the obligation.

FRAUD
– intentional evasion of the faithful performance of the obligation. Also called
“dolo”

2 kinds of fraud:
(1) Fraud in the performance – fraud is committed after the valid execution of the
contract. Remedy is claim for damages.

(2) Fraud in the execution – fraud is committed at the time of the execution of the
contract where the consent of one party was obtained due to the employment of
insidious words or machinations. Refers to dolo causante or causal fraud, in
which, prior to or simultaneous with the execution of a contract, one party
secures the consent of the other by using deception, without which such consent
would not have been given. Remedy is annulment of contract being a voidable
one.

Negligence distinguished from fraud

Negligence
No deliberate intention to cause
damage or injury even if the act was
done voluntarily
Liability may be mitigated or reduced in
certain situations
Waiver of an action to enforce liability
arising from future negligence may be
allowed in certain situations
Fraud
There is deliberate intention or plan to
cause damage or injury
Liability cannot be mitigated or reduced
Waiver of an action to enforce liability
arising from future fraud is not allowed

RESOLUTION/RESCISSION

 Not applicable to contract to sell.

REYES vs. TUPARAN (G.R. No. 188064, June 1, 2011)

The Court agrees with the ruling of the courts below that the subject Deed of
Conditional Sale with Assumption of Mortgage entered into by and among the
two parties and FSL Bank on November 26, 1990 is a contract to sell and not a
contract of sale. The subject contract was correctly classified as a contract to sell
based on the following pertinent stipulations:
8. That the title and ownership of the subject real properties shall remain with the
First Party until the full payment of the Second Party of the balance of the
purchase price and liquidation of the mortgage obligation of ₱2,000,000.00.
Pending payment of the balance of the purchase price and liquidation of the
mortgage obligation that was assumed by the Second Party, the Second Party
shall not sell, transfer and convey and otherwise encumber the subject real
properties without the written consent of the First and Third Party.
9. That upon full payment by the Second Party of the full balance of the purchase
price and the assumed mortgage obligation herein mentioned the Third Party
shall issue the corresponding Deed of Cancellation of Mortgage and the First

19
Party shall execute the corresponding Deed of Absolute Sale in favor of the
Second Party.
Based on the above provisions, the title and ownership of the subject properties
remains with the petitioner until the respondent fully pays the balance of the
purchase price and the assumed mortgage obligation. Thereafter, FSL Bank shall
then issue the corresponding deed of cancellation of mortgage and the petitioner
shall execute the corresponding deed of absolute sale in favor of the respondent.
Accordingly, the petitioner’s obligation to sell the subject properties becomes
demandable only upon the happening of the positive suspensive condition, which
is the respondent’s full payment of the purchase price. Without respondent’s full
payment, there can be no breach of contract to speak of because petitioner has
no obligation yet to turn over the title. Respondent’s failure to pay in full the
purchase price is not the breach of contract contemplated under Article 1191 of
the New Civil Code but rather just an event that prevents the petitioner from
being bound to convey title to the respondent.

SPS. NAMEAL AND LOURDES BONROSTRO vs. SPS. JUAN AND

CONSTACIA LUNA (G.R. No.172346, July 24, 2013)
As may be recalled, the CA, in its assailed Decision, found the contract between
the parties as a contract to sell, specifically of a real property on installment
basis, and as such categorically declared rescission to be not the proper remedy.
This is considering that in a contract to sell, payment of the price is a positive
suspensive condition, failure of which is not a breach of contract warranting
rescission under Article 1191 of the Civil Code but rather just an event that
prevents the supposed seller from being bound to convey title to the supposed
buyer. Also, and as correctly ruled by the CA, Article 1191 cannot be applied to
sales of real property on installment since they are governed by the Maceda Law.

 Right to cancel or resolve is based on breach of faith, not economic injury.

 Limitations on Right to Rescind (Implied Power to Rescind)

1. Due process – if there is already performance by the other party,

aggrieved party cannot declare on his own the rescission. Judicial
action must be resorted to;
2. Right to rescind subordinated to the rights of 3 rd persons who acquired
thing in good faith. This is understood to be without prejudice to the
rights of third persons who have acquired the thing, in accordance with
articles 1385 and 1388 and the Mortgage Law.

3. Court may order fixing of period instead of rescission. Eg. When

default not willful or is excusable. Except: If fixing the period would
serve no other purpose but to delay.

4. Casual or slight breaches will not justify rescission.

5. Remedy is alternative to specific performance.

6. Can be filed by the one who is not at fault (injured party)

TAN vs. CA (175 SCRA 656)

The power to rescind obligations is implied in reciprocal ones in case one
of the obligors should not comply with what is incumbent upon him is clear

20
from a reading of the Civil Code provisions. However, it is equally settled
that, in the absence of a stipulation to the contrary, this power must be
invoked judicially; it cannot be exercised solely on a party’s own judgment
that the other has committed a breach of the obligation. Where there is
nothing in the contract empowering the petitioner to rescind it without
resort to the courts, the petitioner’s action in unilaterally terminating the
contract in this case is unjustified.

SPOUSES ALEXANDER AND JULIE LAM vs. KODAK PHILIPPINES, LTD.

(G.R. No. 167615, January 11, 2016)
With both parties opting for rescission of the contract under Article 1191, the
Court of Appeals correctly ordered for restitution.

As discussed earlier, the breach committed by petitioners was the

nonperformance of a reciprocal obligation, not a violation of the terms and
conditions of the mortgage contract. Therefore, the automatic rescission and
forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the initial payment of
P800.000 and the corresponding mortgage payments in the amounts of P27,225,
P23.000 and P23.925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the
expense of the former. (Emphasis supplied)

When rescission is sought under Article 1191 of the Civil Code, it need not be
judicially invoked because the power to resolve is implied in reciprocal
obligations. The right to resolve allows an injured party to minimize the damages
he or she may suffer on account of the other party's failure to perform what is
incumbent upon him or her. When a party fails to comply with his or her
obligation, the other party's right to resolve the contract is triggered. The
resolution immediately produces legal effects if the non-performing party does
not question the resolution. Court intervention only becomes necessary when
the party who allegedly failed to comply with his or her obligation disputes the
resolution of the contract. Since both parties in this case have exercised their
right to resolve under Article 1191, there is no need for a judicial decree before
the resolution produces effects.

CONSOLIDATED INDUSTRIAL GASES, INC. vs. ALABANG MEDICAL

CENTER (G.R. No. 181983, November 13, 2013)
"Reciprocal obligations are those which arise from the same cause, and in which
each party is a debtor and a creditor of the other, such that the obligation of one
is dependent upon the obligation of the other. They are to be performed
simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other." In reciprocal obligations, neither party
incurs in delay if the other does not comply or is not ready to comply in a proper
manner with what is incumbent upon him. From the moment one of the parties
fulfils his obligation, delay by the other begins.
Under the subject contracts, CIGI as contractor bound itself to install a
centralized medical oxygen and vacuum pipeline system for the first to fifth floors
of AMC, which in turn, undertook to pay the contract price therefor in the manner
prescribed in the contract. Being reciprocal in nature, the respective obligations

21
of AMC and CIGI are dependent upon the performance of the other of its end of
the deal such that any claim of delay or non-performance can only prosper if the
complaining party has faithfully complied with its own obligation.
Here, CIGI complains that AMC refused to abide by its undertaking of full
payment. While AMC does not dispute its liability to pay the balance of
P1,267,344.42 being claimed by CIGI, it asserts, however that the same is not
yet due because CIGI still has not turned over a complete and functional medical
oxygen and vacuum pipeline system. CIGI is yet to conduct a test run of the
installation and an orientation/seminar of AMC employees who will be involved in
the operation of the system. CIGI, on the other hand, does not deny that it failed
to conduct the agreed orientation/seminar and test run but it blames AMC for
such omission and asserts that the latter failed to heed CIGI’s request for
electrical facilities necessary for the test run. CIGI also contends that its
obligation is merely to provide labor and installation.
The Court finds that CIGI did not faithfully complete its prestations and hence, its
demand for payment cannot prosper based on the following grounds: (a) under
the two installation contracts, CIGI was bound to perform more prestations than
merely supplying labor and materials; and (b) CIGI failed to prove by substantial
evidence that it requested AMC for electrical facilities as such, its failure to
conduct a test run and orientation/seminar is unjustified.
It is hornbook doctrine in the law on contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to provided that
such stipulations, clauses, terms and conditions are not contrary to law, morals,
public order or public policy. In the present case, we find no legal proscription
infringed by the terms and conditions of the contracts between AMC and CIGI. As
such, the said terms and conditions must be held to be the law between them
and the parties are bound to fulfill what has been stipulated.
Both of the installation contracts clearly show that CIGI undertook to carry out
more prestations than merely supplying labor and materials for the medical
oxygen and vacuum pipeline system. CIGI agreed also: (a) to perform a pressure
drop, leak testing, test run, painting/color coding of the installed centralized
medical oxygen, vacuum and nitrous oxide pipeline system; and (b) to conduct
orientation, seminars and training for the AMC employees who will be involved in
the operation of the centralized pipeline system before the formal turnover of the
project.
In reciprocal obligations, before a party can demand the performance of the
obligation of the other, the former must also perform its own obligation. For its
failure to turn over a complete project in accordance with the terms and
conditions of the installation contracts, CIGI cannot demand for the payment of
the contract price balance from AMC, which, in turn, cannot legally be ordered to
pay. Otherwise, AMC will be effectively forced to accept an incomplete
performance contrary to Article 1248 of the Civil Code which states that "(u)nless
there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists."
Considering that AMC’s obligation to pay the balance of the contract price did not
accrue, the stipulated interest thereon also did not begin to run.
The Court, however, finds that AMC has no legal basis to demand the rescission
of the installation contracts. "[R]escission of a contract will not be permitted for a
slight or casual breach, but only for such substantial and fundamental violations
as would defeat the very object of the parties in making the agreement. Whether
a breach is substantial is largely determined by the attendant circumstances."
The provisions on the test run of and seminar on the medical oxygen system are

22
not essential parts of the installation contracts as they do not constitute a vital
fragment/part of the centralized medical oxygen system.
Further, the allegedly defective and incomplete parts cannot substantiate
rescission. The photographs submitted by AMC are not adequate to establish
that certain parts of the installed system are indeed defective or incomplete
especially so that the installation never became operational. Unless and until the
medical oxygen and vacuum pipeline actually runs, there is no way of
conclusively verifying that some of its parts are defective or incomplete. In
addition, AMC failed to allege much less show whether the alleged defects and
incomplete components were caused by factory defect, negligence on the part of
CIGI or ordinary wear and tear.
At any rate, the parties have specified warranty clauses in the subject contracts
to answer for such contingency. Since, as discussed above, the agreed test run
and orientation/seminar for both Phases 1 and 2 installation projects were yet to
be performed, both projects are not yet complete and the one year warranty
period has not yet commenced to run.
In view of the fact that rescission is not permissible, the installation contracts of
the parties stand and the terms thereof must be duly fulfilled. CIGI is obliged to
comply with its undertakings to conduct a test run and hold a seminar/orientation
of concerned AMC employees, after which, turn over the system fully functional
and operational to AMC. Simultaneously with the turnover, AMC shall pay the
remaining balance of P1,267,344.42 to CIGI.
Also, the Court finds it proper that after CIGI has turned over a complete and
functional medical oxygen and vacuum pipeline system, it must be given the
opportunity to inspect the allegedly defective and incomplete parts. The results of
such inspection will in turn determine which part of the aforementioned warranty
clauses shall govern.

ANGELES vs. CALASANZ (135 SCRA 323) – accepting delayed installment

payments beyond the grace period amounts to waiver of the right to rescind

ALMIRA vs. COURT OF APPEALS [G.R. No. 115966. March 20, 2003.]

FACTS: Respondent took possession of the property subject of the Kasunduan

and made various payments to petitioners amounting to P58,500.00. However,
upon failure of petitioners to deliver to him a separate title to the property in the
name of Julio Garcia, he refused to make further payments, prompting petitioners
to file a civil action before the Regional Trial Court of San Pedro, Laguna, Branch
32, on May 13, 1991 for (a) rescission of the Kasunduan, etc.
The tenor of the correspondence between petitioners and respondent shows that
the parties intended that a separate title to the property in the name of Julio
Garcia shall be delivered to respondent as a condition for the latter's payment of
the balance of the purchase price. Had the parties intended that petitioners
deliver TCT No. RT-1076 instead of a separate title in the name of Julio Garcia to
respondent, then there would have been no need for petitioners to ask for partial
sums on the ground that this would be used to pay for the processing of the title
to the property. Petitioners had only to present the existing title, TCT No. RT-
1076, to respondent and demand the balance of the purchase price. This,
petitioners did not do. Instead, they were content to ask small sums from
respondent on thirty-nine occasions for two years before filing an action in court
for rescission of the Kasunduan another five years later. It is readily discernible
from the tenor of various receipts issued by petitioners that the sums given by
respondent on these thirty-nine occasions were made upon request of petitioners
seeking respondent's indulgence.
23
Addressing now the issue as to whether rescission of the Kasunduan by
petitioners may prosper, we rule in the negative. The power to rescind is only
given to the injured party. The injured party is the party who has faithfully fulfilled
his obligation or is ready and willing to perform with his obligation. In the case at
bar, petitioners were not ready, willing and able to comply with their obligation to
deliver a separate title in the name of Julio Garcia to respondent. Therefore, they
are not in a position to ask for rescission of the Kasunduan. Moreover,
respondent's obligation to pay the balance of the purchase price was made
subject to delivery by petitioners of a separate title in the name of Julio Garcia
within six (6) months from the time of the execution of the Kasunduan, a
condition with which petitioners failed to comply. Failure to comply with a
condition imposed on the performance of an obligation gives the other party the
option either to refuse to proceed with the sale or to waive that condition under
Article 1545 of the Civil Code. Hence, it is the respondent who has the option
either to refuse to proceed with the sale or to waive the performance of the
condition imposed on his obligation to pay the balance of the purchase price.
It follows that, not having established that they were ready, able and willing to
comply with their obligation to deliver to respondent a separate title in the name
of Julio Garcia, petitioners may not ask for rescission of the Kasunduan nor
recover damages.

 Distinguish from right to terminate based on Resolutory provision:

- In contracts subject to resolutory conditions, the only limitation is that the

contract should not be contrary to law, morals, good customs, public order or
public policy.

 Article 1191 is actually a tacit resolutory condition in reciprocal obligations.

DISTINCTIONS BETWEEN ARTICLE 1191 AND ARTICLE 1380

LALICON vs. NATIONAL HOUSING AUTHORITY (G.R. No. 185440, July 13,
2011)

This case is about (a) the right of the National Housing Authority to seek
annulment of sales made by housing beneficiaries of lands they bought from it
within the prohibited period and (b) the distinction between actions for rescission
instituted under Article 1191 of the Civil Code and those instituted under Article
1381 of the same code.

ISSUE:

Whether or not the NHA’s right to rescind has prescribed; and

RULING:
Invoking the RTC ruling, the Lalicons claim that under Article 1389 of the Civil
Code the “action to claim rescission must be commenced within four years” from
the time of the commission of the cause for it.

But an action for rescission can proceed from either Article 1191 or Article 1381.
It has been held that Article 1191 speaks of rescission in reciprocal obligations
within the context of Article 1124 of the Old Civil Code which uses the term

24
“resolution.” Resolution applies only to reciprocal obligations such that a breach
on the part of one party constitutes an implied resolutory condition which entitles
the other party to rescission. Resolution grants the injured party the option to
pursue, as principal actions, either a rescission or specific performance of the
obligation, with payment of damages in either case.

Rescission under Article 1381, on the other hand, was taken from Article 1291 of
the Old Civil Code, which is a subsidiary action, not based on a party’s breach of
obligation. The four-year prescriptive period provided in Article 1389 applies to
rescissions under Article 1381.
.
Here, the NHA sought annulment of the Alfaros’ sale to Victor because they
violated the five-year restriction against such sale provided in their contract.
Thus, the CA correctly ruled that such violation comes under Article 1191 where
the applicable prescriptive period is that provided in Article 1144 which is 10
years from the time the right of action accrues. The NHA’s right of action
accrued on February 18, 1992 when it learned of the Alfaros’ forbidden sale of
the property to Victor. Since the NHA filed its action for annulment of sale on
April 10, 1998, it did so well within the 10-year prescriptive period.

Summary of Distinctions:
1191 1380
Resolution Rescission
Reciprocal Obligations Not necessarily reciprocal
Principal action retaliatory in character Subsidiary action
Alternative Remedies Last Remedy
Based on breach Based on lesion or economic injury
Prescriptive period is 10 years if based Prescriptive period is 4 years
on written contract

4. Subsidiary remedies of creditors (Art. 1177)

a. Accion subrogatoria – exercise all the rights and bring all the actions of the
debtor save those which are inherent in his person (eg. Right to receive support,
carry out an agency)
b. Accion pauliana – impugn acts done to defraud creditor
c. Accion directa
o Art. 1652 – subsidiary liability of the sublessee to the lessor

o Art. 1608 – vendor may bring his action against every possessor
whose right is derived from the vendee
o Art. 1729 – laborers engaged by the contractor have an action
against the owner up to the amount owing from the owner to the
contractor
o Art. 1893 – in agency, the principal may bring an action against
the substitute

FORTUITOUS EVENT; REQUISITES

25
ARTICLE 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation requires
the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were inevitable.

Fortuitous Events – is an occurrence or happening which could not be foreseen,

or even if foreseen, is inevitable.

Classes:
1. Fortuitous Event (Caso fortuito) – refers to an event which is is absolutely
independent of human intervention. An act of God. Eg. typhoon,
lightning, earthquake.

2. Force Majeure – An event caused by the legitimate or illegitimate acts of

persons other than the obligor. There is human intervention. Eg. war or
armed robbery.

Note: There is no substantial difference between the two events

 General rule as to existence of fortuitous event: If the obligor failed to

perform his obligation by reason thereof, he is exempted from any liability.
The obligation is extinguished.

 Requisites to exempt obligor from liability by reason of fortuitous event:

PHILIPPINE REALTY AND HOLDING CORP. vs. LEY CONST. AND DEV.
CORP./LEY CONS. AND DEV. CORP. (G.R. No. 165548/G.R. No. 167879, June
13, 2011)
Force Majeure. Article 1174 of the Civil Code provides: “Except in cases
expressly specified by the law, or when it is otherwise declared by stipulation or
when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen, or which though
foreseen, were inevitable.” A perusal of the construction agreements shows that
the parties never agreed to make LCDC liable even in cases of force majeure.
Neither was the assumption of risk required. Thus, in the occurrence of events
that could not be foreseen, or though foreseen were inevitable, neither party
should be held responsible.
Under Article 1174 of the Civil Code, to exempt the obligor from liability for a
breach of an obligation due to an “act of God” or force majeure, the following
must concur:
(a) the cause of the breach of the obligation must be independent of the will of
the debtor;
(b) the event must be either unforeseeable or unavoidable;
(c) the event must be such as to render it impossible for the debtor to fulfill his
obligation in a normal manner; and
(d) the debtor must be free from any participation in, or aggravation of the injury
to the creditor.
The shortage in supplies and cement may be characterized as force majeure. In
the present case, hardware stores did not have enough cement available in their
supplies or stocks at the time of the construction in the 1990s. Likewise,
typhoons, power failures and interruptions of water supply all clearly fall under
26
force majeure. Since LCDC could not possibly continue constructing the building
under the circumstances prevailing, it cannot be held liable for any delay that
resulted from the causes aforementioned.
 Tire blowout

ALBERTA YUBIDO vs. CA (GR No. 113033, October 17, 1997)

Facts: Spouses TITO AND Leny Tumboy and two minor children boarded a
Yubido liner for Davao City. Along the road, the left front tire exploded. The bus
fell into a ravine. The incident resulted in the death of Tito Tumboy and physical
injuries to the other passengers. A complaint for breach of contract of carriage
was filed by Leny Tumboy against the Yubido, owner of the bus. When the
defendants therein filed their answer to the complaint, they raised the defense of
fortuitous event.
Issue: Whether the explosion of a newly-installed tire of a passenger vehicle is a
fortuitous event that exempt the carrier from liability for the death of passengers.
Held: The cause of the blow-out, if due to a factory defect, improper mounting,
excessive tire pressure, is not an unavoidable event. On the other hand, there
may have been adverse conditions on the road that were enforceable, which
could make the blow-out caso fortuito. The fact that the cause of the blow-out
was not known does not relieve the carrier from liability. Owing to the statutory
presumption of negligence against the carrier and its obligation to exercise the
utmost diligence of a very foresight can provide, it is the burden of the
defendants to prove that the cause of the blow-out was a fortuitous event. It is
not incumbent upon the plaintiff to prove that the cause of the blow-out is not a
caso fortuito.

 Fire
VIRGINIA REAL vs. SISENANDO H. BELO (G.R. NO. 146224, January 26,
2007)
Article 1174 of the Civil Code provides that no person shall be responsible for a
fortuitous event which could not be foreseen, or which, though foreseen, was
inevitable. In other words, there must be an entire exclusion of human agency
from the cause of injury or loss.
It is established by evidence that the fire originated from leaking fumes from the
LPG stove and tank installed at petitioner's fastfood stall and her employees
failed to prevent the fire from spreading and destroying the other fastfood stalls,
including respondent's fastfood stall. Such circumstances do not support
petitioner's theory of fortuitous event.
Petitioner's bare allegation is far from sufficient proof for the Court to rule in her
favor. It is basic in the rule of evidence that bare allegations, unsubstantiated by
evidence, are not equivalent to proof. In short, mere allegations are not
evidence.
In this case, petitioner not only failed to show that she submitted proof that the
LPG stove and tank in her fastfood stall were maintained in good condition and
periodically checked for defects but she also failed to submit proof that she
exercised the diligence of a good father of a family in the selection and
supervision of her employees. For failing to prove care and diligence in the
maintenance of her cooking equipment and in the selection and supervision of
her employees, the necessary inference was that petitioner had been negligent.

27
METRO CONCAST STEEL CORP., SPOUSES JOSE S. DYCHIAO AND TIU
OH YAN, ET AL. vs. ALLIED BANK CORPORATION ( G.R. No. 177921,
December 4, 2013)
On various dates and for different amounts, Metro Concast, a corporation
engaged in the business of manufacturing steel, through its officers, herein
individual petitioners, obtained several loans from Allied Bank. These loan
transactions were covered by a promissory note and separate letters of
credit/trust receipts. Petitioners failed to settle their obligations under the
aforementioned promissory note and trust receipts, hence, Allied Bank, through
counsel, sent them demand letters, all dated December 10, 1998 seeking
payment of the total amount of P51,064,093.62, but to no avail. Hence, in order
to settle their debts with Allied Bank, petitioners offered the sale of Metro
Concast’s remaining assets, consisting of machineries and equipment, to Allied
Bank, which the latter, however, refused. Instead, Allied Bank advised them to
sell the equipment and apply the proceeds of the sale to their outstanding
obligations. Accordingly, petitioners offered the equipment for sale, but since
there were no takers, the equipment was reduced into ferro scrap or scrap metal
over the years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one
Crisanta Camiling (Camiling), expressed interest in buying the scrap metal. A
Memorandum of Agreement (MOA) was later executed detailing the payments to
be made by Peakstar. Unfortunately, Peakstar reneged on all its obligations
under the MOA.

Petitioners essentially argue that their loan obligations to Allied Bank had already
been extinguished due to Peakstar’s failure to perform its own obligations to
Metro Concast pursuant to the MoA. Petitioners classify Peakstar’s default as a
form of force majeure in the sense that they have, beyond their control, lost the
funds they expected to have received from Peakstar, which they would, in turn,
use to pay their own loan obligations to Allied Bank. They further state that Allied
Bank was equally bound by Metro Concast’s MoA with Peakstar since its agent,
Atty. Saw, actively represented it during the negotiations and execution of the
said agreement.

RULING:
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is therefore, not enough that the event should not have been
foreseen or anticipated, as is commonly believed but it must be one impossible to
foresee or to avoid. The mere difficulty to foresee the happening is not
impossibility to foresee the same.
To constitute a fortuitous event, the following elements must concur: (a) the
cause of the unforeseen and unexpected occurrence or of the failure of the
debtor to comply with obligations must be independent of human will; (b) it must
be impossible to foresee the event that constitutes the caso fortuito or, if it can be
foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and,
(d) the obligor must be free from any participation in the aggravation of the injury
or loss.
Anent petitioners’ reliance on force majeure, suffice it to state that Peakstar’s
breach of its obligations to Metro Concast arising from the MoA cannot be
classified as a fortuitous event under jurisprudential formulation. While it may be
argued that Peakstar's breach of the MoA was unforeseen by petitioners, the
same is clearly not "impossible" to foresee or even an event which is
"independent of human will." Neither has it been shown that said occurrence

28
rendered it impossible for petitioners to pay their loan obligations to Allied Bank
and thus, negates the former's force majeure theory altogether.

 Exceptions which make an obligor liable for fortuitous events:

1. When it is expressly specified by the law:

(a) When the obligor is in delay (Art. 1165, NCC)
(b) When the obligor has promised the same thing to two or more
persons who do not have the same interest (Art. 1165, NCC)
(c) When the possessor is in bad faith and the thing is lost or
deteriorated due to fortuitous event (Art. 552, NCC)
2. When it is otherwise declared by stipulation;
3. When the nature of the obligation requires the assumption of risk (Doctrine
of Created Risk) – This principle is expressly provided in the Mexican
Code (Art. 1913) as follows: “When a person makes use of machinery,
instruments, apparatus or substances which are dangerous in
themselves, by reason of their speed, of their explosive or inflammable
nature, of the electric power they carry, or of other analogous causes, he
is bound to indemnify for the injuries they may cause, even if he does not
act unlawfully, unless the injury is caused by the inexcusable fault or
neglect of the victim.” Eg. a carrier carrying dynamite which explodes and
injures nearby property. The liability should be limited to the risks and
events that are atypical of the business concerned. It cannot extend to
dangers which are not atypical of the business, such as lightning or
earthquake causing injury.

JIMMY CO VS. COURT OF APPEALS AND BROADWAY MOTOR SALES

CORPORATION (G.R. NO. 124922 JUNE 22, 1998)
Even assuming arguendo that carnapping was duly established as a fortuitous
event, still private respondent cannot escape liability. Article 1165 of the New Civil
Code makes an obligor who is guilty of delay responsible even for a fortuitous
event until he has effected the delivery. In this case, private respondent was
already in delay as it was supposed to deliver petitioner's car three (3) days
before it was lost. Petitioner's agreement to the rescheduled delivery does not
defeat his claim as private respondent had already breached its obligation.
Moreover, such accession cannot be construed as waiver of petitioner's right to
hold private respondent liable because the car was unusable and thus, petitioner
had no option but to leave it.
It must likewise be emphasized that pursuant to Articles 1174 and 1262 of the
New Civil Code, liability attaches even if the loss was due to a fortuitous event if
"the nature of the obligation requires the assumption of risk". Carnapping is a
normal business risk for those engaged in the repair of motor vehicles. For just
as the owner is exposed to that risk so is the repair shop since the car was
entrusted to it. That is why, repair shops are required to first register with the
Department of Trade and Industry (DTI) and to secure an insurance policy for the
"shop covering the property entrusted by its customer for repair, service or
maintenance" as a pre-requisite for such registration/accreditation. Violation of
this statutory duty constitutes negligence per se. Having taken custody of the
vehicle private respondent is obliged not only to repair the vehicle but must also
provide the customer with some form of security for his property over which he
loses immediate control. An owner who cannot exercise the seven (7) juses or
attributes of ownership — the right to possess, to use and enjoy, to abuse or
consume, to accessories, to dispose or alienate, to recover or vindicate and to
the fruits — is a crippled owner. Failure of the repair shop to provide security to a
motor vehicle owner would leave the latter at the mercy of the former. Moreover,

29
on the assumption that private respondent's repair business is duly registered, it
presupposes that its shop is covered by insurance from which it may recover the
loss. If private respondent can recover from its insurer, then it would be unjustly
enriched if it will not compensate petitioner to whom no fault can be attributed.
Otherwise, if the shop is not registered, then the presumption of negligence
applies.

 IF THE THING TO BE DELIVERED IS GENERIC OR INDETERMINATE:

OBLIGATION SUBSISTS BECAUSE GENUS NEVER PERISHES (GENUS
NON QUAM PERUIT)

GAISANO CAGAYAN, INC. vs. INSURANCE COMPANY OF NORTH AMERICA

(G.R. No. 147839, June 8, 2006)
Petitioner’s argument that it is not liable because the fire is a fortuitous event
under Article 1174 of the Civil Code is misplaced. As held earlier, petitioner bears
the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of
goods by fire but for petitioner’s accounts with IMC and LSPI that remained
unpaid 45 days after the fire. Accordingly, petitioner’s obligation is for the
payment of money. As correctly stated by the CA, where the obligation consists
in the payment of money, the failure of the debtor to make the payment even by
reason of a fortuitous event shall not relieve him of his liability. The rationale for
this is that the rule that an obligor should be held exempt from liability when the
loss occurs thru a fortuitous event only holds true when the obligation consists in
the delivery of a determinate thing and there is no stipulation holding him liable
even in case of fortuitous event. It does not apply when the obligation is
pecuniary in nature.
Under Article 1263 of the Civil Code, “[i]n an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does not extinguish the
obligation.” If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of
anything of the same kind even without the debtor’s fault and before he has
incurred in delay will not have the effect of extinguishing the obligation. This rule
is based on the principle that the genus of a thing can never perish. Genus
nunquan perit. An obligation to pay money is generic; therefore, it is not excused
by fortuitous loss of any specific property of the debtor.
Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established
that petitioner has outstanding accounts with IMC and LSPI.

KINDS OF CIVIL OBLIGATIONS

A. Pure – Obligation whose performance does not depend upon a future or
uncertain event, or upon a past event unknown to the parties, and is demandable
at once.
B. Conditional – Obligation whose performance or extinguishment depends upon
a future or uncertain event, or upon a past event unknown to the parties.
Kinds of Conditions:
1. Suspensive condition
2. Resolutory condition
30
3. Potestative
4. Casual
5. Mixed
6. Impossible – contrary to law, good customs, or public policy
SPECIAL RULES APPLICABLE:
Suspensive Condition:
- Retroactive effect of fulfillment (ARTICLE 1187, New Civil Code)
- Creditor may bring actions for the preservation of his rights prior to fulfillment
of condition (Art. 1188)

DISTINGUISH CONTRACT TO SELL FROM CONDITIONAL CONTRACT OF

SALE

FERNANDO CARRASCOSO, JR. VS. COURT OF APPEALS (G.R. No. 123672,

December 14, 2005)

In a contract of sale, the title passes to the vendee upon the delivery of
the thing sold; whereas in a contract to sell, ownership is not transferred upon
delivery of the property but upon full payment of the purchase price. In the
former, the vendor has lost and cannot recover ownership until and unless the
contract is resolved or rescinded; whereas in the latter, title is retained by the
vendor until the full payment of the price, such payment being a positive
suspensive condition and failure of which is not a breach but an event that
prevents the obligation of the vendor to convey title from becoming effective.
For in a conditional contract of sale, if the suspensive condition is fulfilled,
the contract of sale is thereby perfected, such that if there had already been
previous delivery of the property subject of the sale to the buyer, ownership
thereto automatically transfers to the buyer by operation of law without any
further act having to be performed by the seller. Whereas in a contract to sell,
upon fulfillment of the suspensive condition, ownership will not automatically
transfer to the buyer although the property may have been previously delivered
to him. The prospective seller still has to convey title to the prospective buyer by
entering into a contract of absolute sale.
A perusal of the contract adverted to in Coronel reveals marked
differences from the Agreement to Buy and Sell in the case at bar. In the
Coronel contract, there was a clear intent on the part of the therein petitioners-
sellers to transfer title to the therein respondent-buyer. In the July 11, 1975
Agreement to Buy and Sell, PLDT still had to “definitely inform Carrascoso of its
decision on whether or not to finalize the deed of absolute sale for the 1,000
hectare portion of the property,” such that in the April 6, 1977 Deed of Absolute
Sale subsequently executed, the parties declared that they “are now decided to
execute” such deed, indicating that the Agreement to Buy and Sell was, as the
appellate court held, merely a preparatory contract in the nature of a contract to
sell. In fact, the parties even had to stipulate in the said Agreement to Buy and
Sell that Carrascoso, “during the existence of the Agreement, shall not sell,
cede, assign and/or transfer the parcel of land,” which provision this Court has
held to be a typical characteristic of a contract to sell.

31
 Being a contract to sell, what was vested by the July 11, 1975 Agreement
to Buy and Sell to PLDT was merely the beneficial title to the 1,000 hectare
portion of the property.

POTESTATIVE CONDITION
- void if suspensive and depends upon the sole will of the debtor
- I will pay if I want to vs. I will pay if my means permit me to do so. (the former
is void being potestative on the part of the debtor, the latter is valid being an
obligation subject to a period)

CATUNGAL, ET. AL. vs. RODRIGUEZ (G.R. No. 146839, March 23, 2011)

Agapita T. Catungal (Agapita) owned a parcel of land (Lot 10963) with an area of
65,246 square meters, covered by Original Certificate of Title (OCT) No. 105 in
her name situated in the Barrio of Talamban, Cebu City. On April 23, 1990,
Agapita, with the consent of her husband Jose, entered into a Contract to Sell
with respondent Rodriguez. Subsequently, the Contract to Sell was "upgraded"
into a Conditional Deed of Sale dated July 26, 1990 between the same parties.
Both the Contract to Sell and the Conditional Deed of Sale were annotated on
the title. The pertinent provisions of the Conditional Deed of Sale are quoted
below:

1. The VENDOR for and in consideration of the sum of

TWENTY FIVE MILLION PESOS (P25,000,000.00)
payable as follows:

a. FIVE HUNDRED THOUSAND PESOS

(P500,000.00) downpayment upon the signing of this
agreement, receipt of which sum is hereby
acknowledged in full from the VENDEE.

b. The balance of TWENTY[-]FOUR MILLION FIVE

HUNDRED THOUSAND PESO'S (P24,500,000.00)
shall be payable in five separate checks, made to the
order of JOSE Ch. CATUNGAL, the first check shall
be for FOUR MILLION FIVE HUNDRED THOUSAND
PESOS (P4,500,000.00) and the remaining balance
to be paid in four checks in the amounts of FIVE
MILLION PESOS (P5,000,000.00) each after the
VENDEE have (sic)' successfully negotiated, secured
and provided a Road Right of Way consisting of 12
meters in width cutting across Lot 10884 up to the
national road, either by widening the existing Road
Right of Way or by securing a new Road Right of Way
of 12 meters in width. If however said Road Right of
Way could not be negotiated, the VENDEE shall give
notice to the VENDOR for them to reassess and solve
the problem by taking other options and should the
situation ultimately prove futile, he shall take steps to
rescind or cancel the herein Conditional Deed of
Sale.

32
 c. That the access road or Road Right of Way leading
to Lot 10963 shall be the responsibility of the
VENDEE to secure and any or all cost relative to the
acquisition thereof shall be borne solely by the
VENDEE. He shall, however, be accorded with
enough time necessary for the success of his
endeavor, granting him a free hand in negotiating for
the passage.

BY THESE PRESENTS, the VENDOR do hereby

agree to sell by way of herein CONDITIONAL DEED
OF SALE to VENDEE, his heirs, successors and
assigns, the real property described in the Original
Certificate of Title No. 105 x x x.

xxxx

5. That the VENDEE has the option to rescind the

sale. In the event the VENDEE exercises his option to
rescind the herein Conditional Deed of Sale, the
VENDEE shall notify the VENDOR by way of a written
notice relinquishing his rights over the property. The
VENDEE shall then be reimbursed by the VENDOR
the sum of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing the downpayment,
interest free, payable but contingent upon the event
that the VENDOR shall have been able to sell the
property to another party.

In accordance with the Conditional Deed of Sale, Rodriguez secured the

necessary surveys and plans and through his efforts, the property was
reclassified from agricultural land into residential land which he claimed
substantially increased the property's value. He likewise actively negotiated for
the road right of way as stipulated in the contract.

On August 31, 1990 the spouses Catungal requested an advance of

P5,000,000.00 on the purchase price for personal reasons. Rodriquez refused on
the ground that the amount was substantial and was not due under the terms of
their agreement. Shortly after his refusal to pay the advance, he learned that the
Catungals were offering the property for sale to third parties.

Thereafter, Rodriguez received letters dated October 22, 1990, October 24, 1990
and October 29, 1990, all signed by Jose Catungal who was a lawyer, essentially
demanding that the former make up his mind about buying the land or exercising
his "option" to buy because the spouses Catungal received other offers and they
needed money to pay for personal obligations and for investing in other
properties/business ventures. Should Rodriguez fail to exercise his option to buy
the land, the Catungals warned that they would consider the contract cancelled
and that they were free to look for other buyers.

In a letter dated November 4, 1990, Rodriguez registered his objections to what

he termed the Catungals' unwarranted demands in view of the terms of the
Conditional Deed of Sale which allowed him sufficient time to negotiate a road
right of way and granted him, the vendee, the exclusive right to rescind the
contract. Still, on November 15, 1990, Rodriguez received a letter dated

33
November 9, 1990 from Atty. Catungal, stating that the contract had been
cancelled and terminated.

Thus, Rodriguez filed a Complaint for Injunction and Damages against Catungal.
In their Answer, the Catungals argued that paragraphs 1(b) and 5 of the
Conditional Deed of Sale, whether taken separately or jointly, violated the
principle of mutuality of contracts and that these provisions constituted
potestative conditions dependent on the sole will of the debtor and thus, said
contract was void ab initio.

HELD:
Petitioners rely on Article 1308 of the Civil Code to support their conclusion
regarding the claimed nullity of the aforementioned provisions. Article 1308 states
that "[t]he contract must bind both contracting parties; its validity or compliance
cannot be left to the will of one of them."

Article 1182 of the Civil Code, in turn, provides:

Art. 1182. When the fulfillment of the condition depends upon the sole will of the
debtor, the conditional obligation shall be void. If it depends upon chance or upon
the will of a third person, the obligation shall take effect in conformity with the
provisions of this Code.

In the past, this Court has distinguished between a condition imposed on the
perfection of a contract and a condition imposed merely on the performance of
an obligation. While failure to comply with the first condition results in the failure
of a contract, failure to comply with the second merely gives the other party the
option to either refuse to proceed with the sale or to waive the condition. This
principle is evident in Article 1545 of the Civil Code on sales, which provides in
part:

Art. 1545. Where the obligation of either party to a contract of sale is subject to
any condition which is not performed, such party may refuse to proceed with the
contract or he may waive performance of the condition x x x.

Paragraph 1(b) of the Conditional Deed of Sale, stating that respondent shall pay
the balance of the purchase price when he has successfully negotiated and
secured a road right of way, is not a condition on the perfection of the contract
nor on the validity of the entire contract or its compliance as contemplated in
Article 1308. It is a condition imposed only on respondent's obligation to pay the
remainder of the purchase price. In our view and applying Article 1182, such a
condition is not purely potestative as petitioners contend. It is not dependent on
the sole will of the debtor but also on the will of third persons who own the
adjacent land and from whom the road right of way shall be negotiated. In a
manner of speaking, such a condition is likewise dependent on chance as there
is no guarantee that respondent and the third party-landowners would come to
an agreement regarding the road right of way. This type of mixed condition is
expressly allowed under Article 1182 of the Civil Code.

We share the opinion of the appellate court that the undertaking required of
private respondent does not constitute a "potestative condition dependent solely
on his will" that might, otherwise, be void in accordance with Article 1182 of the
Civil Code but a "mixed" condition "dependent not on the will of the vendor alone
but also of third persons like the squatters and government agencies and
personnel concerned." We must hasten to add, however, that where the so-called

34
"potestative condition" is imposed not on the birth of the obligation but on its
fulfillment, only the condition is avoided, leaving unaffected the obligation itself.
From the provisions of the Conditional Deed of Sale subject matter of this case, it
was the vendee (Rodriguez) that had the obligation to successfully negotiate and
secure the road right of way. However, in the decision of the trial court, which
was affirmed by the Court of Appeals, it was found that respondent Rodriguez
diligently exerted efforts to secure the road right of way but the spouses
Catungal, in bad faith, contributed to the collapse of the negotiations for said road
right of way. To quote from the trial court’s decision:
It is therefore apparent that the vendee’s obligations to pay the balance of the
purchase price arises only when the road-right-of-way to the property shall have
been successfully negotiated, secured and provided. In other words, the
obligation to pay the balance is conditioned upon the acquisition of the road-right-
of-way, in accordance with paragraph 2 of Article 1181 of the New Civil Code.
Accordingly, "an obligation dependent upon a suspensive condition cannot be
demanded until after the condition takes place because it is only after the
fulfillment of the condition that the obligation arises." (Javier vs. CA 183 SCRA).
Rodriguez indeed was diligent in his efforts to negotiate for a road-right-of-way to
the property. The written offers, proposals and follow-up of his proposals show
that Rodriguez went all out in his efforts to immediately acquire an access road to
the property, even going to the extent of offering P3,000.00 per square meter for
the road lots from the original P550.00 per sq. meter. This Court also notes that
Catungals made misrepresentation in the negotiation they have entered into with
Rodriguez. The misrepresentation of the Catungals as to the third lot (Lot 10986)
to be part and parcel of the subject property (Lot 10963) contributed in defeating
Rodriguez’s effort in acquiring the road-right-of-way to the property. The
Catungals cannot now invoke the non-fulfillment of the condition in the contract
as a ground for rescission when defendants [the Catungals] themselves are
guilty of preventing the fulfillment of such condition.
OBLIGATION WITH A PERIOD OR A TERM – Art. 1193

BUCE vs. COURT OF APPEALS (G.R. No. 136913, May 12, 2000)

The basic issue, as agreed upon by the parties, is the correct interpretation of the
contract provision "this lease shall be for a period of fifteen (15) years effective
June 1, 1979, subject to renewal for another ten (10) years, under the same
terms and conditions."

The phrase "subject to renewal for another ten (10) years" is unclear on whether
the parties contemplated an automatic renewal or extension of the term, or just
an option to renew the contract; and if what exists is the latter, who may exercise
the same or for whose benefit it was stipulated.

In the case at bar, it was not specifically indicated who may exercise the option to
renew, neither was it stated that the option was given for the benefit of herein
petitioner. Thus, pursuant to the Fernandez ruling and Article 1196 of the Civil
Code, the period of the lease contract is deemed to have been set for the benefit
of both parties. Renewal of the contract may be had only upon their mutual
agreement or at the will of both of them. Since the private respondents were not
amenable to a renewal, they cannot be compelled to execute a new contract
when the old contract terminated on 1 June 1994. It is the owner-lessor’s
prerogative to terminate the lease at its expiration. The continuance, effectivity
and fulfillment of a contract of lease cannot be made to depend exclusively upon
the free and uncontrolled choice of the lessee between continuing the payment of

35
the rentals or not, completely depriving the owner of any say in the matter.
Mutuality does not obtain in such a contract of lease and no equality exists
between the lessor and the lessee since the life of the contract would be dictated
solely by the lessee.

 If period is intended but obligation does not state, court may fix the period
(Art. 1197)

RADIOWEALTH FINANCE COMPANY vs. Spouses VICENTE and MA.

SUMILANG DEL ROSARIO (G.R. No. 138739, July 6, 2000)
Respondents, on the other hand, counter that the installments were not yet due
and demandable. Petitioner had allegedly allowed them to apply their promotion
services for its financing business as payment of the Promissory Note. This was
supposedly evidenced by the blank space left for the date on which the
installments should have commenced. In other words, respondents theorize that
the action for immediate enforcement of their obligation is premature because its
fulfillment is dependent on the sole will of the debtor. Hence, they consider that
the proper court should first fix a period for payment, pursuant to Articles 1180
and 1197 of the Civil Code.
This contention is untenable. The act of leaving blank the due date of the first
installment did not necessarily mean that the debtors were allowed to pay as and
when they could. If this was the intention of the parties, they should have so
indicated in the Promissory Note. However, it did not reflect any such intention.
On the contrary, the Note expressly stipulated that the debt should be amortized
monthly in installments of P11,579 for twelve consecutive months. While the
specific date on which each installment would be due was left blank, the Note
clearly provided that each installment should be payable each month.
Furthermore, it also provided for an acceleration clause and a late payment
penalty, both of which showed the intention of the parties that the installments
should be paid at a definite date. Had they intended that the debtors could pay
as and when they could, there would have been no need for these two clauses.
Verily, the contemporaneous and subsequent acts of the parties manifest their
intention and knowledge that the monthly installments would be due and
demandable each month. In this case, the conclusion that the installments had
already became due and demandable is bolstered by the fact that respondents
started paying installments on the Promissory Note, even if the checks were
dishonored by their drawee bank. We are convinced neither by their avowals
that the obligation had not yet matured nor by their claim that a period for
payment should be fixed by a court.

 Court may also fix the period if it depends upon the will of the debtor (Eg.
When my means permit me to do so.)

 Thus, unless period is fixed, specific performance as an action would be

premature.

 When will the debtor lose the right to make use of the period?
ARTICLE 1198. The debtor shall lose every right to make use
of the period:

36
 (1) When after the obligation has been contracted, he becomes
insolvent, unless he gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised;
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through a fortuitous
event they disappear, unless he immediately gives new ones
equally satisfactory;
(4) When the debtor violates any undertaking, in consideration
of which the creditor agreed to the period;
(5) When the debtor attempts to abscond.

GAITE V. FONACIER (G.R. NO. L-11827, JULY 31, 1961)

In the same document, Gaite transferred to Fonacier all his rights and interests
over the “24,000 tons of iron ore, more or less” that the former had already
extracted from the mineral claims, in consideration of the sum of P75,000,
P10,000, of which was paid upon the signing of the agreement, and the balance
to be paid out of the first letter of credit covering the first shipment of iron ores or
the first amount derived from the local sale of iron ore made by the Larap Mines
& Smelting Co. To secure the payment of the balance, Fonacier promised to
execute in favor of Gaite a surety bond; delivered on 8 December 1954 with
Fonacier as principal and the Larap Mines and Smelting Co. and its stockholders
as sureties. A second bond was executed by the parties to the first bond, on the
same day, with the Far Eastern Surety and Insurance Co. as additional surety,
but it provided that the liability of the surety company would attach only when
there had been an actual sale of iron ore by the Larap Mines & Smelting Co. for
an amount of not less than P65,000. On 8 December 1955, the bond with
respect to the Far Eastern Surety and Insurance Company expired with no sale
of the approximately 24,000 tons of iron ore, nor had the 65,000 balance of the
price of said ore been paid to Gaite by Fonacier and his sureties. Whereupon,
Gaite demanded from Fonacier and his sureties payment of said amount.
When Fonacier and his sureties failed to pay as demanded by Gaite, the latter
filed a complaint against them in the CFI Manila (Civil Case 29310) for the
payment of the P65,000 balance of the price of the ore, consequential damages,
and attorney’s fees.
The Supreme Court affirmed the decision appealed from, with costs against
appellants.
1. Shipment or local sale of ore not a condition precedent but a suspensive
period or term
The shipment or local sale of the iron ore is not a condition precedent (or
suspensive) to the payment of the balance of P65,000, but was only a
suspensive period or term. What characterizes a conditional obligation is the fact
that its efficacy or obligatory force (as distinguished from its demandability) is
subordinated to the happening of a future and uncertain event; so that if the
suspensive condition does not take place, the parties would stand as if the
conditional obligation had never existed.
2. The words of the contract express no contingency in the buyer’s obligation to
pay.
The contract stipulates that “the balance of Sixty-Five Thousand Pesos
(P65,000) will be paid out of the first letter of credit covering the first shipment of
iron ore . . .” etc. There is no uncertainty that the payment will have to be made
sooner or later; what is undetermined is merely the exact date at which it will be

37
made. By the very terms of the contract, therefore, the existence of the obligation
to pay is recognized; only its maturity or demandability is deferred.
3. Contract of sale commutative and onerous; Each party assume correlative
obligation and anticipate performance from the other
A contract of sale is normally commutative and onerous: not only does each one
of the parties assume a correlative obligation (the seller to deliver and transfer
ownership of the thing sold and the buyer to pay the price), but each party
anticipates performance by the other from the very start. While in a sale the
obligation of one party can be lawfully subordinated to an uncertain event, so that
the other understands that he assumes the risk of receiving nothing for what he
gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in
the usual course of business to do so; hence, the contingent character of the
obligation must clearly appear. In the present case, nothing is found in the record
to evidence that Gaite desired or assumed to run the risk of losing his rights over
the ore without getting paid for it, or that Fonacier understood that Gaite
assumed any such risk. The fact that appellants did put up such bonds indicates
that they admitted the definite existence of their obligation to pay the balance of
P65,000.
4. To consider sale as a condition precedent leaves the payment at the
discretion of the debtor
To subordinate the obligation to pay the remaining P65,000 to the sale or
shipment of the ore as a condition precedent, would be tantamount to leaving the
payment at the discretion of the debtor, for the sale or shipment could not be
made unless the appellants took steps to sell the ore. Appellants would thus be
able to postpone payment indefinitely. Such construction of the contract should
be avoided.
5. Interpretation incline in favor of the “greatest reciprocity of interests”
Assuming that there could be doubt whether by the wording of the contract the
parties intended a suspensive condition or a suspensive period (dies ad quem)
for the payment of the P65,000, the rules of interpretation would incline the
scales in favor of “the greatest reciprocity of interests”, since sale is essentially
onerous. The Civil Code of the Philippines, Article 1378, paragraph 1, in fine,
provides “if the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests” and there can be no question that greater
reciprocity obtains if the buyer’s obligation is deemed to be actually existing, with
only its maturity (due date) postponed or deferred, than if such obligation were
viewed as non-existent or not binding until the ore was sold.
6. Sale of ore to Fonacier was a sale on credit, not an aleatory contract
The sale of the ore to Fonacier was a sale on credit, and not an aleatory contract
where the transferor, Gaite, would assume the risk of not being paid at all; and
that the previous sale or shipment of the ore was not a suspensive condition for
the payment of the balance of the agreed price, but was intended merely to fix
the future date of the payment.
7. Non-renewal of bond impaired the securities given to the creditor
Appellants have forfeited the right to compel Gaite to wait for the sale of the ore
before receiving payment of the balance of P65,000, because of their failure to
renew the bond of the Far Eastern Surety Company or else replace it with an
equivalent guarantee. The expiration of the bonding company’s undertaking on 8
December 1955 substantially reduced the security of the vendor’s rights as
creditor for the unpaid P65,000, a security that Gaite considered essential and
upon which he had insisted when he executed the deed of sale of the ore to
Fonacier. The case squarely comes under paragraphs 2 and 3 of Article 1198 of
the Civil Code of the Philippines which provides “(2) When he does not furnish to

38
the creditor the guaranties or securities which he has promised. (3) When by his
own acts he has impaired said guaranties or securities after their establishment,
and when through fortuitous event they disappear, unless he immediately gives
new ones equally satisfactory.” Appellants’ failure to renew or extend the surety
company’s bond upon its expiration plainly impaired the securities given to the
creditor (appellee Gaite), unless immediately renewed or replaced.
8. No waiver intended by creditor
Gaite’s acceptance of the surety company’s bond with full knowledge that on its
face it would automatically expire within one year was not a waiver of its renewal
after the expiration date. No such waiver could have been intended, for Gaite
stood to lose and had nothing to gain thereby; and if there was any, it could be
rationally explained only if the appellants had agreed to sell the ore and pay
Gaite before the surety company’s bond expired on 8 December 1955. But in the
latter case the defendants- appellants’ obligation to pay became absolute after 1
year from the transfer of the ore to Fonacier by virtue of the deed.

 Rules in case of improvements, loss or deterioration is the same in

suspensive conditions.

ALTERNATIVE OR FACULTATIVE OBLIGATIONS

1. Difference between alternative and facultative obligations

Alternative Facultative

Number of prestations Several prestations but One prestation but may

only one is due deliver another as
substitute

Effect of Loss Loss of one will not Loss of the principal will
extinguish obligation as extinguish the obligation
long as there are others even if the substitute
remaining remains. Loss of the
substitute does not
extinguish the obligation.

Right of Choice Belongs to the debtor Belongs to the debtor

unless expressly given to
the creditor

RULE IN CASE OF LOSS BY REASON OF DEBTOR’S FAULT:

Choice belongs to the debtor:
1. If there are others available, no liability;
2. If all are lost, damages based on the value of the thing which last
disappeared;
Choice belongs to the creditor:
1. If there are others available, creditor has the right to claim any of
those which remains or the price of the one which disappeared,
with right to damages;

39
 2. If all are lost, damages based on the value of any of the thing which
disappeared, plus damages.

JOINT AND SOLIDARY OBLIGATION

Joint Obligation
- Presumption is joint unless otherwise indicated by the law or nature of
obligation (Art. 1207)
- Each credit is distinct from one another, therefore a joint debtor cannot be
required to pay for the share of another with debtor, although he may pay
if he wants to (Art. 1209)
- Insolvency of a joint debtor: others are not liable for his share (Art. 1209)

Solidary Obligation
- Anyone of the solidary creditors may collect or demand payment of whole
obligation; there is mutual agency among solidary debtors (Arts. 1214,
1215)
- Any of the solidary debtors may be required to pay the whole obligation;
there is mutual guaranty among solidary debtors (Arts. 1216, 1217, 1222)

- Each solidary creditor may do whatever maybe useful to the others, but
not anything prejudicial to them (Art. 1212); however, any novation,
compensation, confusion or remission of debt executed by any solidary
creditor shall extinguish the obligation without prejudice to his liability for
the shares of the other solidary creditors
- Defenses available to the solidary debtor:

a. Defenses derived from the nature of the obligation (eg.

Prescription, payment, statute of frauds)
b. Defenses personal to the debtor himself (minority);
c. Defenses personal to the other solidary debtors (insanity)

MARSMAN DRYSDALE LAND, INC. vs. PHILIPPINE GEOANALYTICS, INC.

AND GOTESCO PROPERTIES, INC. (G.R. No. 183374, June 29, 2010)

On February 12, 1997, Marsman Drysdale Land, Inc. (Marsman Drysdale) and
Gotesco Properties, Inc. (Gotesco) entered into a Joint Venture Agreement (JVA)
for the construction and development of an office building on a land owned by
Marsman Drysdale in Makati City. Under the JVA, Marsman shall contribute the
property with an appraised value of P420,000,000.00 and Gotesco shall
contribute the amount of P420,000,000.00 in cash. Construction funding for the
Project shall be obtained from the cash contribution of Gotesco. Marsman
Drysdale shall not be obligated to fund the Project as its contribution is limited to

40
the Property. All funds advanced by a Party (or by third parties in substitution for
advances from a Party) shall be repaid by the JV. If any Party agrees to make an
advance to the Project but fails to do so (in whole or in part) the other party may
advance the shortfall and the Party in default shall indemnify the Party making
the substitute advance on demand for all of its losses, costs and expenses
incurred in so doing.

Via Technical Services Contract (TSC) dated July 14, 1997, the joint venture
engaged the services of Philippine Geoanalytics, Inc. (PGI) to provide subsurface
soil exploration, laboratory testing, seismic study and geotechnical engineering
for the project. PGI, was, however, able to drill only four of five boreholes
needed to conduct its subsurface soil exploration and laboratory testing, justifying
its failure to drill the remaining borehole to the failure on the part of the joint
venture partners to clear the area where the drilling was to be made. PGI was
able to complete its seismic study though. PGI then billed the joint venture on
November 24, 1997 for P284,553.50 representing the cost of partial subsurface
soil exploration; and on January 15, 1998 for P250,800 representing the cost of
the completed seismic study. Despite repeated demands from PGI, the joint
venture failed to pay its obligations. Meanwhile, due to unfavorable economic
conditions at the time, the joint venture was cut short and the planned building
project was eventually shelved.

PGI subsequently filed on November 11, 1999 a complaint for collection of sum
of money and damages at the Regional Trial Court (RTC) of Quezon City
against Marsman Drysdale and Gotesco.

HELD:

The core issue to be resolved then is which between joint venturers Marsman
Drysdale and Gotesco bears the liability to pay PGI its unpaid claims. To
Marsman Drysdale, it is Gotesco since, under the JVA, construction funding for
the project was to be obtained from Gotesco’s cash contribution, as its
(Marsman Drysdale’s) participation in the venture was limited to the land.
Gotesco maintains, however, that it has no liability to pay PGI since it was due
to the fault of Marsman Drysdale that PGI was unable to complete its
undertaking.

The Court finds Marsman Drysdale and Gotesco jointly liable to PGI. PGI
executed a technical service contract with the joint venture and was never a
party to the JVA. While the JVA clearly spelled out, inter alia, the capital
contributions of Marsman Drysdale (land) and Gotesco (cash) as well as the
funding and financing mechanism for the project, the same cannot be used to
defeat the lawful claim of PGI against the two joint venturers-partners. The TSC
clearly listed the joint venturers Marsman Drysdale and Gotesco as the
beneficial owner of the project, and all billing invoices indicated the consortium
therein as the client. Articles 1207 and 1208 of the Civil Code, which
respectively read:

Art. 1207. The concurrence of two or more creditors or of

two or more debtors in one and the same obligation does not imply
that each one of the former has a right to demand, or that each one
of the latter is bound to render, entire compliance with the
prestations. There is a solidary liability only when the obligation
expressly so states, or when the law or nature of the obligation
requires solidarity.

41
 Art. 1208. If from the law, or the nature or the wording of the
obligations to which the preceding article refers the contrary does
not appear, the credit or debt shall be presumed to be divided into
as many equal shares as there are creditors or debtors, the credits
or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits. (emphasis and
underscoring supplied),

presume that the obligation owing to PGI is joint between Marsman Drysdale
and Gotesco. The only time that the JVA may be made to apply in the present
petitions is when the liability of the joint venturers to each other would set in. In
the JVA, Marsman Drysdale and Gotesco agreed on a 50-50 ratio on the
proceeds of the project. They did not provide for the splitting of losses,
however. Applying Article 1797 of the New Civil Code then, the same ratio
applies in splitting the P535,353.50 obligation-loss of the joint venture. The
appellate court’s decision must be modified, however. Marsman Drysdale and
Gotesco being jointly liable, there is no need for Gotesco to reimburse Marsman
Drysdale for “50% of the aggregate sum due” to PGI. Allowing Marsman
Drysdale to recover from Gotesco what it paid to PGI would not only be contrary
to the law on partnership on division of losses but would partake of a clear case
of unjust enrichment at Gotesco’s expense. The grant by the lower courts of
Marsman Drysdale cross-claim against Gotesco was thus erroneous.

INDIVISIBLE OBLIGATIONS
- Obligation cannot be performed in parts but debtors are bound jointly

- Indivisibility refers to the subject matter; solidarity refers to the tie between
the parties.
- In case of failure of one joint debtor to perform his part (share), there is
default but only debtor guilty shall be liable for damages

SPOUSES ALEXANDER AND JULIE LAM vs. KODAK PHILIPPINES, LTD.

(G.R. No. 167615, January 11, 2016)

On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into
an agreement (Letter Agreement) for the sale of three (3) units of the Kodak
Minilab System 22XL (Minilab Equipment) in the amount of P1,796,000.00 per
unit, with the following terms:

“This confirms our verbal agreement for Kodak Phils., Ltd. to provide
Colorkwik Laboratories, Inc. with three (3) units Kodak Minilab
System 22XL . . . for your proposed outlets in Rizal Avenue
(Manila), Tagum (Davao del Norte), and your existing Multicolor
photo counter in Cotabato City under the following terms and
conditions:

1. Said Minilab Equipment packages will avail a total of 19%

multiple order discount based on prevailing equipment price
provided said equipment packages will be purchased not later than
June 30, 1992.

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 2. 19% Multiple Order Discount shall be applied in the form of
merchandise and delivered in advance immediately after signing of
the contract.
* Also includes start-up packages worth P61,000.00.

3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly

installments at P35,000.00 inclusive of 24% interest rate for the first
12 months; the balance shall be re-amortized for the remaining 36
months and the prevailing interest shall be applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8,

1992 is at P1,796,000.00.

6. Price is subject to change without prior notice.

* Secured with PDCs; 1st monthly amortization due 45 days after
installation.”

On January 15, 1992, Kodak Philippines, Ltd. delivered one unit of the Minilab
Equipment in Tagum, Davao Province. The delivered unit was installed by
Noritsu representatives on March 9, 1992. The Lam Spouses issued postdated
checks amounting to P35,000.00 each for 12 months as payment for the first
delivered unit, with the first check due on March 31, 1992. The Lam Spouses
requested that Kodak Philippines, Ltd. not negotiate the check dated March 31,
1992 allegedly due to insufficiency of funds. The same request was made for the
check due on April 30, 1992. However, both checks were negotiated by Kodak
Philippines, Ltd. and were honored by the depository bank. The 10 other checks
were subsequently dishonored after the Lam Spouses ordered the depository
bank to stop payment. Kodak Philippines, Ltd. canceled the sale and demanded
that the Lam Spouses return the unit it delivered together with its accessories.
The Lam Spouses ignored the demand but also rescinded the contract through
the letter dated November 18, 1992 on account of Kodak Philippines, Ltd.'s
failure to deliver the two (2) remaining Minilab Equipment units after 3 months.

On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin
and/or recovery of sum of money. In their Answer with Counterclaim, the Lam
Spouses contended that Kodak Philippines, Ltd. defaulted in the performance of
its obligation under its Letter Agreement, that Kodak Philippines, Ltd.'s failure to
deliver 2 out of the 3 units of the Minilab Equipment caused the Lam Spouses to
stop paying for the rest of the installments. They argued that the Letter
Agreement for 3 Minilab Equipment units was not severable, divisible, and
susceptible of partial performance. Kodak’s recovery of the delivered unit was
therefore unjustified. With the obligation being indivisible, they claimed that
Kodak's failure to comply with its obligation to deliver the 2 remaining Minilab
Equipment units amounted to a breach, which entitled them to the remedy of
rescission and damages under Article 1191 of the New Civil Code.

In its Reply, Kodak pointed out that the Letter Agreement did not specify a period
within which the delivery of all units was to be made, that it did not deliver the
other two units due to the failure of the Lam Spouses to make good the
installments subsequent to the second, and that the 3 Minilab Equipment are
intended for installation at Lam Spouses’ Tagum, Davao del Norte, Sta. Cruz,
Manila and Cotabato City outlets such that each of these units is independent
from one another, as many of them may perform its own job without the other.
Since each unit could perform on its own, there was no need to await the delivery

43
of the other units to complete its job and when the Lam Spouses ordered the
depository bank to stop payment of the issued checks covering the first delivered
unit, they violated their obligations under the Letter Agreement since Kodak was
already entitled to full payment.

ISSUES:

First, whether the contract between petitioners Spouses Alexander and Julie Lam
and respondent Kodak Philippines, Ltd. pertained to obligations that are
severable, divisible, and susceptible of partial performance under Article 1225 of
the New Civil Code; and

Second, upon rescission of the contract, what the parties are entitled to under
Article 1190 and Article 1522 of the New Civil Code.

RULING:

The Letter Agreement contained an indivisible obligation.

Based on the contract, the intention of the parties is for there to be a single
transaction covering all three (3) units of the Minilab Equipment. Respondent's
obligation was to deliver all products purchased under a "package," and, in turn,
petitioners' obligation was to pay for the total purchase price, payable in
installments.

The intention of the parties to bind themselves to an indivisible obligation can be

further discerned through their direct acts in relation to the package deal. There
was only one agreement covering all three (3) units of the Minilab Equipment and
their accessories. The Letter Agreement specified only one purpose for the
buyer, which was to obtain these units for three different outlets. If the intention of
the parties were to have a divisible contract, then separate agreements could
have been made for each Minilab Equipment unit instead of covering all three in
one package deal. Furthermore, the 19% multiple order discount as contained in
the Letter Agreement was applied to all three acquired units. The "no
downpayment" term contained in the Letter Agreement was also applicable to all
the Minilab Equipment units. Lastly, the fourth clause of the Letter Agreement
clearly referred to the object of the contract as "Minilab Equipment Package."

There is no indication in the Letter Agreement that the units petitioners ordered
were covered by three (3) separate transactions. The factors considered by the
Court of Appeals are mere incidents of the execution of the obligation, which is to
deliver three units of the Minilab Equipment on the part of respondent and
payment for all three on the part of petitioners. The intention to create an
indivisible contract is apparent from the benefits that the Letter Agreement
afforded to both parties. Petitioners were given the 19% discount on account of a
multiple order, with the discount being equally applicable to all units that they
sought to acquire. The provision on "no downpayment" was also applicable to all
units. Respondent, in turn, was entitled to payment of all three Minilab Equipment
units, payable by installments.

With both parties opting for rescission of the contract under Article 1191, the
Court of Appeals correctly ordered for restitution.

As discussed earlier, the breach committed by petitioners was the

nonperformance of a reciprocal obligation, not a violation of the terms and

44
conditions of the mortgage contract. Therefore, the automatic rescission and
forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their original
situation prior to the inception of the contract. Accordingly, the initial payment of
P800.000 and the corresponding mortgage payments in the amounts of P27,225,
P23.000 and P23.925 (totaling P874,150.00) advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the
expense of the former. (Emphasis supplied)

When rescission is sought under Article 1191 of the Civil Code, it need not be
judicially invoked because the power to resolve is implied in reciprocal
obligations. The right to resolve allows an injured party to minimize the damages
he or she may suffer on account of the other party's failure to perform what is
incumbent upon him or her. When a party fails to comply with his or her
obligation, the other party's right to resolve the contract is triggered. The
resolution immediately produces legal effects if the non-performing party does
not question the resolution. Court intervention only becomes necessary when
the party who allegedly failed to comply with his or her obligation disputes the
resolution of the contract. Since both parties in this case have exercised their
right to resolve under Article 1191, there is no need for a judicial decree before
the resolution produces effects.

OBLIGATIONS WITH A PENAL CLAUSE – Arts. 1226, 1228-1230

FILINVEST LAND, INC. VS. COURT OF APPEALS (G.R. NO.138980,
SEPTEMBER 20, 2005)

There is no question that the penalty of P15,000.00 per day of delay was
mutually agreed upon by the parties and that the same is sanctioned by law. A
penal clause is an accessory undertaking to assume greater liability in case of
breach. It is attached to an obligation in order to insure performance and has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event
of breach.

 Proof of actual damages not required

 May be reduced if:

a. Principal obligation is partly complied with;
FILINVEST LAND, INC. VS. COURT OF APPEALS (G.R. NO.138980,
SEPTEMBER 20, 2005)
As it is settled that the project was already 94.53% complete and that
Filinvest did agree to extend the period for completion of the project,
which extensions Filinvest included in computing the amount of the
penalty, the reduction thereof is clearly warranted.
. . . [I]n any case wherein there has been a partial or
irregular compliance with the provisions in a contract for
special indemnification in the event of failure to comply with
its terms, courts will rigidly apply the doctrine of strict
construction against the enforcement in its entirety of the

45
 indemnification, where it is clear from the terms of the
contract that the amount or character of the indemnity is
fixed without regard to the probable damages which might
be anticipated as a result of a breach of the terms of the
contract; or, in other words, where the indemnity provided for
is essentially a mere penalty having for its principal object
the enforcement of compliance with the contract (Meaning,
the courts may reduce the penalty). But the courts will be
slow in exercising the jurisdiction conferred upon them in
article 1154 so as to modify the terms of an agreed upon
indemnification where it appears that in fixing such
indemnification the parties had in mind a fair and reasonable
compensation for actual damages anticipated as a result of a
breach of the contract, or, in other words, where the principal
purpose of the indemnification agreed upon appears to have
been to provide for the payment of actual anticipated and
liquidated damages rather than the penalization of a breach
of the contract (Meaning, the courts will not reduce the
penalty). (Emphases supplied)

The Supreme Court in Laureano instructed that a distinction between a

penalty clause imposed essentially as penalty in case of breach and a
penalty clause imposed as indemnity for damages should be made in
cases where there has been neither partial nor irregular compliance with
the terms of the contract. In cases where there has been partial or
irregular compliance, as in this case, there will be no substantial difference
between a penalty and liquidated damages insofar as legal results are
concerned.

b. Principal obligation is irregularly complied with;

c. If penalty is iniquitous or unconscionable.
ERMINDA F. FLORENTINO vs. SUPERVALUE, INC.(G.R. No.
172384, September 12, 2007)
The foregoing provision in the Contract of Lease mandates that
before the petitioner can introduce any improvement on the leased
premises, she should first obtain respondent’s consent. In the
case at bar, it was not shown that petitioner previously secured the
consent of the respondent before she made the improvements on
the leased space in SM Megamall. It was not even alleged by the
petitioner that she obtained such consent or she at least attempted
to secure the same. Moreover, it is consonant with human
experience that lessees, before occupying the leased premises,
especially store spaces located inside malls and big commercial
establishments, would renovate the place and introduce
improvements thereon according to the needs and nature of their
business and in harmony with their trademark designs as part of
their marketing ploy to attract customers. Certainly, no inducement
or misrepresentation from the lessor is necessary for this purpose,
for it is not only a matter of necessity that a lessee should re-design
its place of business but a business strategy as well.

46
 In ascertaining whether the penalty is unconscionable or not, this
court set out the following standard in Ligutan v. Court of Appeals,
to wit:
The question of whether a penalty is reasonable or
iniquitous can be partly subjective and partly objective. Its
resolution would depend on such factor as, but not
necessarily confined to, the type, extent and purpose of the
penalty, the nature of the obligation, the mode of breach and
its consequences, the supervening realities, the standing
and relationship of the parties, and the like, the application of
which, by and large, is addressed to the sound discretion of
the court. xxx.

In the instant case, the forfeiture of the entire amount of the

security deposits in the sum of P192,000.00 was excessive and
unconscionable considering that the gravity of the breaches
committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable
therefore to reduce the penalty of the petitioner to 50% of the total
amount of security deposits.

LIMLINGAN AND LEYCO vs. ASIAN INSTITUTE OF MANAGEMENT, INC.

(G.R. No. 220481, February 17, 2016)
To recapitulate and for future guidance, the guidelines laid down in the
case of Eastern Shipping Lines are accordingly modified to embody BSP-
MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held liable
for damages. The provisions under Title XVIII on "Damages" of the Civil Code
govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages,
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to

47
 have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory
prior to July 1, 2013, shall not be disturbed and shall continue to be implemented
applying the rate of interest fixed therein.

EXTINGUISHMENT OF OBLIGATIONS

DE CASTRO vs. CA (G.R. No. 115838, July 18, 2002)

The word accept, as used in Article 1235 of the Civil Code, means to take as
satisfactory or sufficient, or agree to an incomplete or irregular performance.
Hence, the mere receipt of a partial payment is not equivalent to the required
acceptance of performance as would extinguish the whole obligation.
There is thus clear distinction between acceptance and mere receipt. In this
case, it is evident that Artigo merely received the partial payment without waiving
the balance. Thus, there is no estoppel to speak of.

DOMINION INSURANCE CORPORATION vs. CA (G.R. No. 129919, February 6,

2002)
Rodolfo S. Guevarra instituted a case for sum of money against defendant
Dominion Insurance Corporation. Plaintiff sought to recover thereunder the
sum of P156,473.90 which he claimed to have advanced in his capacity as
manager of defendant to satisfy certain claims filed by defendant’s clients.

Issues:

1. Whether respondent Guevarra acted within his authority as agent for

petitioner; and

2. Whether respondent Guevarra is entitled to reimbursement of amounts he

paid out of his personal money in settling the claims of several insured.

Held:

1. No. The instruction of petitioner as the principal could not be any clearer.
Respondent Guevarra was authorized to pay the claim of the insured, but the
payment shall come from the revolving fund or collection in his possession.
Having deviated from the instructions of the principal, the expenses that
respondent Guevarra incurred in the settlement of the claims of the insured may
not be reimbursed from petitioner Dominion. This conclusion is in accord with
Article 1918, Civil Code, which states that:

“The principal is not liable for the expenses incurred by the agent in the following
cases:

“(1) If the agent acted in contravention of the principal’s instructions,

unless the latter should wish to avail himself of the benefits derived from

48
 the contract;

“xxx xxx xxx”

2. However, while the law on agency prohibits respondent Guevarra from

obtaining reimbursement, his right to recover may still be justified under the
general law on obligations and contracts. Article 1236, second paragraph, Civil
Code, provides: “Whoever pays for another may demand from the debtor what
he has paid, except that if he paid without the knowledge or against the will of
the debtor, he can recover only insofar as the payment has been beneficial to the
debtor.” In this case, when the risk insured against occurred, petitioner’s liability
as insurer arose. This obligation was extinguished when respondent Guevarra
paid the claims and obtained Release of Claim Loss and Subrogation Receipts
from the insured who were paid. Thus, to the extent that the obligation of the
petitioner has been extinguished, respondent Guevarra may demand for
reimbursement from his principal. To rule otherwise would result in unjust
enrichment of petitioner.

VICTORIA MOREÑO-LENTFER, GUNTER LENTFER and JOHN CRAIGIE

YOUNG CROSS vs. HANS JURGEN WOLFF (G.R. No. 152317, November 10,
2004)
The petitioners are Gunter Lentfer, a German citizen; his Filipina wife, Victoria
Moreño-Lentfer; and John Craigie Young Cross, an Australian citizen, all residing
in Sabang, Puerto Galera, Oriental Mindoro. Respondent Hans Jurgen Wolff is a
German citizen, residing in San Lorenzo Village, Makati City.
Petitioners alleged that with respondent, on March 6, 1992, they engaged the
notarial services of Atty. Rodrigo C. Dimayacyac for: (1) the sale of a beach
house owned by petitioner Cross in Sabang, Puerto Galera, Oriental Mindoro,
and (2) the assignment of Cross' contract of lease on the land where the house
stood. The sale of the beach house and the assignment of the lease right would
be in the name of petitioner Victoria Moreño-Lentfer, but the total consideration of
220,000 Deutschmarks (DM) would be paid by respondent Hans Jurgen Wolff. A
promissory note was executed by said respondent in favor of petitioner Cross.
According to respondent, however, the Lentfer spouses were his confidants who
held in trust for him, a time deposit account in the amount of DM 200,000 at Solid
Bank Corporation. Apprised of his interest to own a house along a beach, the
Lentfer couple urged him to buy petitioner Cross' beach house and lease rights in
Puerto Galera. Respondent agreed and through a bank-to-bank transaction, he
paid Cross the amount of DM 221,700 as total consideration for the sale and
assignment of the lease rights. However, Cross, Moreño-Lentfer and Atty.
Dimayacyac surreptitiously executed a deed of sale whereby the beach house
was made to appear as sold to Moreño-Lentfer for only P100,000. The
assignment of the lease right was likewise made in favor of Moreño-Lentfer.
Upon learning of this, respondent filed a Complaint docketed as Civil Case No.
R-4219 with the lower court for annulment of sale and reconveyance of property
with damages and prayer for a writ of attachment.
HELD: Article 1238 of the New Civil Code provides:
ART. 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the
debtor's consent. But the payment is in any case valid as to the creditor
who has accepted it.

49
Petitioners posit that in a contract of sale, the seller is the creditor, who in this
case is Cross, and the buyer is the debtor, namely Moreño-Lentfer in this case.
Respondent is the third person who paid the consideration on behalf of Moreño-
Lentfer, the debtor. Petitioners insist that respondent did not intend to be
reimbursed for said payment and debtor Moreño-Lentfer consented to it. Thus,
by virtue of Article 1238, payment by respondent is considered a donation.
Respondent counters that Article 1238 bears no relevance to the case since it
applies only to contracts of loan where payment is made by a third person to a
creditor in favor of a debtor of a previously incurred obligation. The instant case,
in contrast, involves a contract of sale where no real creditor-debtor relationship
exists between the parties. Further, respondent argues his conduct never at any
time intimated any intention to donate in favor of petitioner Moreño-Lentfer.
Moreover, respondent contends that the alleged donation is void for non-
compliance with the formal requirements set by law. Citing Article 748 of the New
Civil Code, respondent avers that since the amount involved exceeds P5,000,
both the donation and its acceptance must be in writing for the donation to be
valid. Respondent further says there was no simultaneous delivery of the money
as required by Art. 748 for instances of oral donation. Respondent also calls our
attention to the sudden change in petitioners' theory. Previously, before the Court
of Appeals, the petitioners claimed that what was donated were the subject
properties. But before this Court, they insist that what was actually donated was
the money used in the purchase of subject properties.
On this point, we find petitioners' stance without merit. Article 1238 of the New
Civil Code is not applicable in this case.
Trying to apply Art. 1238 to the instant case is like forcing a square peg into a
round hole. The absence of intention to be reimbursed, the qualifying
circumstance in Art. 1238, is negated by the facts of this case. Respondent's acts
contradict any intention to donate the properties to petitioner Moreño-Lentfer.
When respondent learned that the sale of the beach house and assignment of
the lease right were in favor of Victoria Moreño-Lentfer, he immediately filed a
complaint for annulment of the sale and reconveyance of the property with
damages and prayer for a writ of attachment. Respondent Moreño-Lentfer at that
time claimed the beach house, together with the lease right, was donated to her.
Noteworthy, she had changed her theory, to say that it was only the money used
in the purchase that was donated to her. But in any event, respondent actually
stayed in the beach house in the concept of an owner and shouldered the
expenses for its maintenance and repair amounting to P200,000 for the entire
period of his stay for ten weeks. Moreover, the appellate court found that
respondent is not related or even close to the Lentfer spouses. Obviously,
respondent had trusted the Lentfer spouses to keep a time deposit account for
him with Solid Bank for the purpose of making the purchase of the cited
properties.
Petitioner Moreño-Lentfer's claim of either cash or property donation rings hollow.
A donation is a simple act of liberality where a person gives freely of a thing or
right in favor of another, who accepts it. But when a large amount of money is
involved, equivalent to P3,297,800, based on the exchange rate in the year 1992,
we are constrained to take the petitioners' claim of liberality of the donor with
more than a grain of salt.
Petitioners could not brush aside the fact that a donation must comply with the
mandatory formal requirements set forth by law for its validity. Since the subject
of donation is the purchase money, Art. 748 of the New Civil Code is applicable.
Accordingly, the donation of money equivalent to P3,297,800 as well as its

50
acceptance should have been in writing. It was not. Hence, the donation is invalid
for non-compliance with the formal requisites prescribed by law.

DATION IN PAYMENT

TAN SHUY VS. SPOUSES MAULAWIN (G.R. No. 190375, February 8, 2012)

Petitioner Tan Shuy is engaged in the business of buying copra and corn in the
Fourth District of Quezon Province. According to Vicente Tan (Vicente), son of
petitioner, whenever they would buy copra or corn from crop sellers, they would
prepare and issue a pesada in their favor. A pesada is a document containing
details of the transaction, including the date of sale, the weight of the crop
delivered, the trucking cost, and the net price of the crop. He then explained that
when a pesada contained the annotation pd on the total amount of the purchase
price, it meant that the crop delivered had already been paid for by petitioner.

Guillermo Maulawin (Guillermo), respondent in this case, is a farmer-

businessman engaged in the buying and selling of copra and corn. On 10 July
1997, Tan Shuy extended a loan to Guillermo in the amount of ₱420,000. In
consideration thereof, Guillermo obligated himself to pay the loan and to sell
lucad or copra to petitioner. Most of the transactions involving Tan Shuy and
Guillermo were coursed through Elena Tan, daughter of petitioner. She served as
cashier in the business of Tan Shuy, who primarily prepared and issued the
pesada. In case of her absence, Vicente would issue the pesada. He also helped
his father in buying copra and granting loans to customers (copra sellers).
According to Vicente, part of their agreement with Guillermo was that they would
put the annotation sulong on the pesada when partial payment for the loan was
made.

Petitioner alleged that despite repeated demands, Guillermo remitted only

₱23,000 in August 1998 and ₱5,500 in October 1998, or a total of ₱28,500. 1 He
claimed that respondent had an outstanding balance of ₱391,500. Thus,
convinced that Guillermo no longer had the intention to pay the loan, petitioner
brought the controversy to the Lupon Tagapamayapa. When no settlement was
reached, petitioner filed a Complaint before the Regional Trial Court (RTC).

Respondent Guillermo countered that he had already paid the subject loan
in full. According to him, he continuously delivered and sold copra to petitioner
from April 1998 to April 1999. Respondent said they had an oral arrangement that
the net proceeds thereof shall be applied as installment payments for the loan.
He alleged that his deliveries amounted to ₱420,537.68 worth of copra. To
bolster his claim, he presented copies of pesadas issued by Elena and Vicente.
He pointed out that the pesadas did not contain the notation pd, which meant that
actual payment of the net proceeds from copra deliveries was not given to him,
but was instead applied as loan payment. He averred that Tan Shuy filed a case
against him, because petitioner got mad at him for selling copra to other copra
buyers.

RULING:

Indeed, pursuant to Article 1232 of the Civil Code, an obligation is extinguished

by payment or performance. There is payment when there is delivery of money
or performance of an obligation. Article 1245 of the Civil Code provides for a
special mode of payment called dation in payment (dacin en pago). There is
1
51
dation in payment when property is alienated to the creditor in satisfaction of a
debt in money. Here, the debtor delivers and transmits to the creditor the
formers ownership over a thing as an accepted equivalent of the payment or
performance of an outstanding debt. In such cases, Article 1245 provides that
the law on sales shall apply, since the undertaking really partakes in one sense
of the nature of sale; that is, the creditor is really buying the thing or property of
the debtor, the payment for which is to be charged against the debtors obligation.
Dation in payment extinguishes the obligation to the extent of the value of the
thing delivered, either as agreed upon by the parties or as may be proved, unless
the parties by agreement express or implied, or by their silence consider the
thing as equivalent to the obligation, in which case the obligation is totally
extinguished. The subsequent arrangement between Tan Shuy and Guillermo
can thus be considered as one in the nature of dation in payment. There was
partial payment every time Guillermo delivered copra to petitioner, chose not to
collect the net proceeds of his copra deliveries, and instead applied the
collectible as installment payments for his loan from Tan Shuy. We therefore
uphold the findings of the trial court, as affirmed by the CA, that the net proceeds
from Guillermos copra deliveries amounted to ₱378,952.43. With this partial
payment, respondent remains liable for the balance totaling ₱41,047.57.

PAPA vs. VALENCIA (G.R. No. 105188, January 23, 1998)

Petitioner argues that respondent Court of Appeals erred in concluding that the
alleged sale of the subject property had been consummated. He contends that
such a conclusion is based on the erroneous presumption that the check (in the
amount of P40,000.00) had been cashed, citing Art. 1249 of the Civil Code,
which provides, in part, that payment by checks shall produce the effect of
payment only when they have been cashed or when through the fault of the
creditor they have been impaired. Petitioner insists that he never cashed said
check; and, such being the case, its delivery never produced the effect of
payment. Petitioner, while admitting that he had issued receipts for the
payments, asserts that said receipts, particularly the receipt of PCIB Check No.
761025 in the amount of P40,000.00, do not prove payment. He avers that there
must be a showing that said check had been encashed. If, according to
petitioner, the check had been encashed, respondent Peñarroyo should have
presented PCIB Check No. 761025 duly stamped received by the payee, or at
least its microfilm copy.
Petitioner finally avers that, in fact, the consideration for the sale was still in the
hands of respondents Valencia and Peñarroyo, as evidenced by a letter
addressed to him in which said respondents wrote, in part:
x x x. Please be informed that I had been authorized by Dr. Ramon Papa, Jr.,
heir of Mrs. Angela M. Butte to pay you the aforementioned amount of
P75,000.00 for the release and cancellation of subject property’s mortgage. The
money is with me and if it is alright with you, I would like to tender the payment
as soon as possible. x x x.i[8]
We find no merit in petitioner’s arguments.

It is an undisputed fact that respondents Valencia and Peñarroyo had given

petitioner Myron C. Papa the amounts of Five Thousand Pesos (P5,000.00) in
cash on 24 May 1973, and Forty Thousand Pesos (P40,000.00) in check on 15
June 1973, in payment of the purchase price of the subject lot. Petitioner himself
admits having received said amounts, ii[9] and having issued receipts therefor. iii
[10] Petitioner’s assertion that he never encashed the aforesaid check is not
subtantiated and is at odds with his statement in his answer that “he can no
longer recall the transaction which is supposed to have happened 10 years ago.”
After more than ten (10) years from the payment in part by cash and in part by

52
check, the presumption is that the check had been encashed. As already stated,
he even waived the presentation of oral evidence.
Granting that petitioner had never encashed the check, his failure to do so for
more than ten (10) years undoubtedly resulted in the impairment of the check
through his unreasonable and unexplained delay.
While it is true that the delivery of a check produces the effect of payment only
when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if
the debtor is prejudiced by the creditor’s unreasonable delay in presentment.
The acceptance of a check implies an undertaking of due diligence in presenting
it for payment, and if he from whom it is received sustains loss by want of such
diligence, it will be held to operate as actual payment of the debt or obligation for
which it was given.iv[11] It has, likewise, been held that if no presentment is made
at all, the drawer cannot be held liable irrespective of loss or injury v[12] unless
presentment is otherwise excused. This is in harmony with Article 1249 of the
Civil Code under which payment by way of check or other negotiable instrument
is conditioned on its being cashed, except when through the fault of the creditor,
the instrument is impaired. The payee of a check would be a creditor under this
provision and if its non-payment is caused by his negligence, payment will be
deemed effected and the obligation for which the check was given as conditional
payment will be discharged.vi[13]
Considering that respondents Valencia and Peñarroyo had fulfilled their part of
the contract of sale by delivering the payment of the purchase price, said
respondents, therefore, had the right to compel petitioner to deliver to them the
owner’s duplicate of TCT No. 28993 of Angela M. Butte and the peaceful
possession and enjoyment of the lot in question.

 Is credit card considered legal tender?

MANDARIN VILLA vs. CA (G.R. No. 119850, June 20, 1996)

In the evening of October 19, 1989, private respondent, Clodualdo de Jesus, a

practicing lawyer and businessman, hosted a dinner for his friends at the
petitioner's restaurant the Mandarin Villa Seafoods Village, Greenhills,
Mandaluyong City. After dinner the waiter handed to him the bill in the amount of
P2,658.50. Private respondent offered to pay the bill through his credit card
issued by Philippine Commercial Credit Card Inc. (BANKARD). This card was
accepted by the waiter who immediately proceeded to the restaurant's cashier for
card verification. Ten minutes later, however, the waiter returned and audibly
informed private respondent that his credit card had expired. Private respondent
remonstrated that said credit card had yet to expire on September 1990, as
embossed on its face. The waiter was unmoved, thus, private respondent and
two of his guests approached the restaurant's cashier who again passed the
credit card over the verification computer. The same information was produced,
i.e., CARD EXPIRED. Private respondent and his guests returned to their table
and at this juncture, Professor Lirag, another guest, uttered the following
remarks: "Clody [referring to Clodualdo de Jesus], may problema ba? Baka
kailangang maghugas na kami ng pinggan?" Thereupon, private respondent left
the restaurant and got his BPI Express Credit Card from his car and offered it to
pay their bill. This was accepted and honored by the cashier after verification.
Petitioner and his companions left afterwards.

ISSUE: Whether or not petitioner is bound to accept payment by means of credit

card.

HELD: Petitioner contends that it cannot be faulted for its cashier's refusal to
accept private respondent's BANKARD credit card, the same not being a legal

53
tender. It argues that private respondent's offer to pay by means of credit card
partook of the nature of a proposal to novate an existing obligation for which
petitioner, as creditor, must first give its consent otherwise there will be no
binding contract between them. Petitioner cannot seek refuge behind this
averment.
We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact,
an "Agreement" entered into by petitioner and BANKARD dated June 23, 1989,
provides inter alia:
"The MERCHANT shall honor validly issued PCCCI credit cards presented by
their corresponding holders in the purchase of goods and/or services supplied by
it provided that the card expiration date has not elapsed and the card number
does not appear on the latest cancellation bulletin of lost, suspended and
cancelled PCCCI credit cards and, no signs of tampering, alterations or
irregularities appear on the face of the credit card."
While private respondent may not be a party to the said agreement, the above-
quoted stipulation conferred a favor upon the private respondent, a holder of
credit card validly issued by BANKARD. This stipulation is a stipulation pour
autri and under Article 1311 of the Civil Code private respondent may demand its
fulfillment provided he communicated his acceptance to the petitioner before its
revocation. In this case, private respondent's offer to pay by means of his
BANKARD credit card constitutes not only an acceptance of the said stipulation
but also an explicit communication of his acceptance to the obligor.
In addition, the record shows that petitioner posted a logo inside Mandarin Villa
Seafood Village stating that "Bankard is accepted here. This representation is
conclusive upon the petitioner which it cannot deny or disprove as against the
private respondent, the party relying thereon. Petitioner, therefore, cannot
disclaim its obligation to accept private respondent's BANKARD credit card
without violating the equitable principle of estoppel.

EQUITABLE PCI BANK vs. NG SHEUNG NGOR (G.R. No. 171545, December
19, 2007)
Extraordinary inflation exists when there is an unusual decrease in the
purchasing power of currency (that is, beyond the common fluctuation in the
value of currency) and such decrease could not be reasonably foreseen or was
manifestly beyond the contemplation of the parties at the time of the obligation.
Extraordinary deflation, on the other hand, involves an inverse situation. For
extraordinary inflation (or deflation) to affect an obligation, the following requisites
must be proven:
1. that there was an official declaration of extraordinary
inflation or deflation from the Bangko Sentral ng Pilipinas
(BSP);

2. that the obligation was contractual in nature; and

3. that the parties expressly agreed to consider the effects

of the extraordinary inflation or deflation.

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose
out of a contract, the parties did not agree to recognize the effects of
extraordinary inflation (or deflation). The RTC never mentioned that there was a
such stipulation either in the promissory note or loan agreement. Therefore,
respondents should pay their dollar-denominated loans at the exchange rate
fixed by the BSP on the date of maturity.

54
APO FRUITS CORPORATION and HIJO PLANTATION, INC. vs. COURT OF
APPEALS and LAND BANK OF THE PHILIPPINES (G.R. No. 164195,
December 19, 2007)

The constitutional limitation of “just compensation” is considered to be the sum

equivalent to the market value of the property, broadly described to be the price
fixed by the seller in open market in the usual and ordinary course of legal action
and competition or the fair value of the property as between one who receives,
and one who desires to sell, it being fixed at the time of the actual taking by the
government. Thus, if property is taken for public use before compensation is
deposited with the court having jurisdiction over the case, the final compensation
must include interests on its just value to be computed from the time the property
is taken to the time when compensation is actually paid or deposited with the
court. In fine, between the taking of the property and the actual payment, legal
interests accrue in order to place the owner in a position as good as (but not
better than) the position he was in before the taking occurred.

x x x This allowance of interest on the amount found to be

the value of the property as of the time of the taking computed,
being an effective forbearance, at 12% per annum should help
eliminate the issue of the constant fluctuation and inflation of the
value of the currency over time. Article 1250 of the Civil Code,
providing that, in case of extraordinary inflation or deflation, the
value of the currency at the time of the establishment of the
obligation shall be the basis for the payment when no agreement to
the contrary is stipulated, has strict application only to contractual
obligations. In other words, a contractual agreement is needed for
the effects of extraordinary inflation to be taken into account to alter
the value of the currency.

YULIM INTERNATIONAL COMPANY LTD. ET. AL. vs. INTERNATIONAL

EXCHANGE BANK (G.R. No. 203133, February 18, 2015)
On June 2, 2000, iBank, a commercial bank, granted Yulim, a domestic
partnership, a credit facility in the form of an Omnibus Loan Line for
P5,000,000.00, as evidenced by a Credit Agreement which was secured by a
Chattel Mortgage over Yulim’s inventories in its merchandise warehouse at 106
4th Street, 9th Avenue, Caloocan City. As further guarantee, the partners,
namely, James, Jonathan and Almerick, executed a Continuing Surety
Agreement in favor of iBank. Yulim availed of its aforesaid credit facility with
iBank covered by several promissory notes. The promissory notes (PN) were
later consolidated under a single promissory note, PN No. SADDK001014188,
for P4,246,310.00, to mature on February 28, 2002. Yulim defaulted on the said
note. On April 5, 2002, iBank sent demand letters to Yulim, through its President,
James, and through Almerick, but without success. iBank then filed a Complaint
for Sum of Money with Replevin against Yulim and its sureties.
The petitioners insist that they have paid their loan to iBank. They maintain that
the letter of iBank to them dated May 4, 2001, which "expressly stipulated that
the petitioners shall execute a Deed of Assignment over one condominium unit
No. 141, 3rd Floor and a parking slot located at 20 Landsbergh Place, Tomas
Morato Avenue, Quezon City," was with the understanding that the Deed of
Assignment, which they in fact executed, delivering also to iBank all the pertinent
supporting documents, would serve to totally extinguish their loan obligation to
iBank. In particular, the petitioners state that it was their understanding that upon
approval by iBank of their Deed of Assignment, the same "shall be considered as

55
full and final payment of the petitioners’ obligation." They further assert that
iBank’s May 4, 2001 letter expressly carried the said approval.
The petitioner invoked Article1255 of the Civil Code, on payment by cession,
which provides: Art. 1255. The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, unless there is stipulation to the
contrary, shall only release the debtor from responsibility for the net proceeds of
the thing assigned. The agreements which, on the effect of the cession, are
made between the debtor and his creditors shall be governed by special laws.
RULING:
The petition is bereft of merit. As regards the petitioners’ contention that iBank in
its letter dated May 4, 2001 had "accepted/approved" the assignment of its
condominium unit in Tomas Morato Avenue as full and final payment of their
various loan obligations, what the letter accepted was only the collaterals
provided for the loans, as well as the consolidation of the petitioners’ various
PN’s under one PN for their aggregate amount of P4,246,310.00. The letter goes
on to spell out the terms of the new PN, such as, that its expiry would be
February 28, 2002 or a term of 360 days, that interest would be due every 90
days, and that the rate would be based on the 91-day Treasury Bill rate or other
market reference. Nowhere can it be remotely construed that the letter even
intimates an understanding by iBank that the Deed of Assignment would serve to
extinguish the petitioners’ loan. Otherwise, there would have been no need for
iBank to mention therein the three "collaterals" or "supports" provided by the
petitioners, namely, the Deed of Assignment, the Chattel Mortgage and the
Continuing Surety Agreement executed by the individual petitioners. In fact,
Section 2.01 of the Deed of Assignment expressly acknowledges that it is a mere
"interim security for the repayment of any loan granted and those that may be
granted in the future by the BANK to the ASSIGNOR and/or the BORROWER,
for compliance with the terms and conditions of the relevant credit and/or loan
documents thereof." The condominium unit, then, is a mere temporary security,
not a payment to settle their promissory notes. Even more unmistakably, Section
2.02 of the Deed of Assignment provides that as soon as title to the condominium
unit is issued in its name, Yulim shall "immediately execute the necessary Deed
of Real Estate Mortgage in favor of the BANK to secure the loan obligations of
the ASSIGNOR and/or the BORROWER." This is a plain and direct
acknowledgement that the parties really intended to merely constitute a real
estate mortgage over the property. In fact, the Deed of Assignment expressly
states, by way of a resolutory condition concerning the purpose or use of the
Deed of Assignment, that after the petitioners have delivered or caused the
delivery of their title to iBank, the Deed of Assignment shall then become null and
void. Shorn of its legal efficacy as an interim security, the Deed of Assignment
would then become functus officio once title to the condominium unit has been
delivered to iBank. This is so because the petitioners would then execute a Deed
of Real Estate Mortgage over the property in favor of iBank as security for their
loan obligations.
To stress, the assignment being in its essence a mortgage, it was but a security
and not a satisfaction of the petitioners’ indebtedness. Article 1255 of the Civil
Code invoked by the petitioners contemplates the existence of two or more
creditors and involves the assignment of the entire debtor’s property, not a
dacion en pago. Under Article 1245 of the Civil Code, "[d]ation in payment,
whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales." Nowhere in the Deed of Assignment can
it be remotely said that a sale of the condominium unit was contemplated by the
parties, the consideration for which would consist of the amount of outstanding
loan due to iBank from the petitioners.

56
Distinctions between Cession and Dation in Payment

Cession Dation in Payment

Debtor is insolvent
Several creditors
Totality of properties is involved
Property itself is not to be paid
but the net proceeds
Rules on insolvency apply
Insolvency not required
Plurality of creditors not required
Specific property is ceded
Property itself is paid
Law on sales applies

TENDER OF PAYMENT AND CONSIGNATION – ARTS. 1256-1261

MYRNA RAMOS vs. SUSANA S. SARAO [G.R. No. 149756. February 11, 2005]
Concededly, sending to the creditor a tender of payment and notice of
consignation -- which was precisely what petitioner did -- may be done in the
same act.
Because petitioners’ consignation of the amount of P1,633,034.20 was valid, it
produced the effect of payment. “The consignation, however, has a retroactive
effect, and the payment is deemed to have been made at the time of the deposit
of the thing in court or when it was placed at the disposal of the judicial authority.”
“The rationale for consignation is to avoid making the performance of an
obligation more onerous to the debtor by reason of causes not imputable to him.”

 Gen. Rule: Consignation alone without a prior tender of payment is not

effective as payment. Exceptions (Art. 1256):

 Consignation alone shall produce the same effect in the following cases:

(1) When the creditor is absent or unknown, or does not appear at the
place of payment;
(2) When he is incapacitated to receive the payment at the time it is
due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.

SPOUSES CACAYORIN vs. ARMED FORCES AND POLICE MUTUAL

BENEFIT ASSOCIATION, INC. (G.R. No. 171298, April 15, 2013)
Consignation is necessarily judicial. Article 1258 of the Civil Code specifically
provides that consignation shall be made by depositing the thing or things due at
the disposal of judicial authority. The said provision clearly precludes
consignation in venues other than the courts.
Petitioner Oscar Cacayorin (Oscar) is a member of respondent Armed Forces
and Police Mutual Benefit Association, Inc. (AFPMBAI), a mutual benefit
association engaged in the business of developing low-cost housing projects for
personnel of the Armed Forces of the Philippines, Philippine National Police,
Bureau of Fire Protection, Bureau of Jail Management and Penology, and
Philippine Coast Guard. He filed an application with AFPMBAI to purchase a
piece of property which the latter owned through a loan facility. Oscar and his
57
wife and co-petitioner herein, Thelma, on one hand, and the Rural Bank of San
Teodoro (the Rural Bank) on the other, executed a Loan and Mortgage
Agreement with the former as borrowers and the Rural Bank as lender, under the
auspices of Pag-IBIG or Home Development Mutual Fund’s Home Financing
Program. On the basis of the Rural Bank’s letter of guaranty, AFPMBAI executed
in petitioners’ favor a Deed of Absolute Sale, and TCT No. 37017 was issued in
their name, with the corresponding annotation of their mortgage agreement with
the Rural Bank.
Unfortunately, the Pag-IBIG loan facility did not push through and the Rural Bank
closed and was placed under receivership by the Philippine Deposit Insurance
Corporation (PDIC). Meanwhile, AFPMBAI somehow was able to take
possession of petitioners’ loan documents and TCT No. 37017, while petitioners
were unable to pay the loan/consideration for the property.
AFPMBAI made oral and written demands for petitioners to pay the loan/
consideration for the property. Petitioners filed a Complaint for consignation of
loan payment, recovery of title and cancellation of mortgage annotation against
AFPMBAI, PDIC and the Register of Deeds of Puerto Princesa City before the
Regional Trial Court (RTC). Petitioners alleged in their Complaint that as a result
of the Rural Bank’s closure and PDIC’s claim that their loan papers could not be
located, they were left in a quandary as to where they should tender full payment
of the loan and how to secure cancellation of the mortgage annotation on TCT
No. 37017.
AFPMBAI filed a Motion to Dismiss claiming that petitioners’ Complaint falls
within the jurisdiction of the Housing and Land Use Regulatory Board (HLURB)
and not the Puerto Princesa RTC, as it was filed by petitioners in their capacity
as buyers of a subdivision lot and it prays for specific performance of contractual
and legal obligations decreed under Presidential Decree No. 957 (PD 957). It
added that since no prior valid tender of payment was made by petitioners, the
consignation case was fatally defective and susceptible to dismissal.
RULING:
The Complaint makes out a case for consignation. The settled principle is that
"the allegations of the Complaint determine the nature of the action and
consequently the jurisdiction of the courts. This rule applies whether or not the
plaintiff is entitled to recover upon all or some of the claims asserted therein as
this is a matter that can be resolved only after and as a result of the trial."
From the allegations in the Complaint, it appears that the petitioners’ debt is
outstanding; that the Rural Bank’s receiver, PDIC, informed petitioners that it has
no record of their loan even as it took over the affairs of the Rural Bank, which on
record is the petitioners’ creditor as per the July 4, 1994 Loan and Mortgage
Agreement; that one way or another, AFPMBAI came into possession of the loan
documents as well as TCT No. 37017; that petitioners are ready to pay the loan
in full; however, under the circumstances, they do not know which of the two –
the Rural Bank or AFPMBAI – should receive full payment of the purchase price,
or to whom tender of payment must validly be made.
Under Article 1256 of the Civil Code, the debtor shall be released from
responsibility by the consignation of the thing or sum due, without need of prior
tender of payment, when the creditor is absent or unknown, or when he is
incapacitated to receive the payment at the time it is due, or when two or more
persons claim the same right to collect, or when the title to the obligation has
been lost. Applying Article 1256 to the petitioners’ case as shaped by the
allegations in their Complaint, the Court finds that a case for consignation has
been made out, as it now appears that there are two entities which petitioners

58
must deal with in order to fully secure their title to the property: 1) the Rural Bank
(through PDIC), which is the apparent creditor under the July 4, 1994 Loan and
Mortgage Agreement; and 2) AFPMBAI, which is currently in possession of the
loan documents and the certificate of title, and the one making demands upon
petitioners to pay. Clearly, the allegations in the Complaint present a situation
where the creditor is unknown, or that two or more entities appear to possess the
same right to collect from petitioners. Whatever transpired between the Rural
Bank or PDIC and AFPMBAI in respect of petitioners’ loan account, if any, such
that AFPMBAI came into possession of the loan documents and TCT No. 37017,
it appears that petitioners were not informed thereof, nor made privy thereto.
Moreover, petitioners’ position is buttressed by AFPMBAI’s own admission in its
Comment that it made oral and written demands upon the former, which naturally
aggravated their confusion as to who was their rightful creditor to whom payment
should be made – the Rural Bank or AFPMBAI. Its subsequent filing of the
Motion to Dismiss runs counter to its demands to pay. If it wanted to be paid with
alacrity, then it should not have moved to dismiss Civil Case No. 3812, which
was brought precisely by the petitioners in order to be able to finally settle their
obligation in full.
Finally, the lack of prior tender of payment by the petitioners is not fatal to their
consignation case. They filed the case for the exact reason that they were at a
loss as to which between the two – the Rural Bank or AFPMBAI – was entitled to
such a tender of payment. Besides, as earlier stated, Article 1256 authorizes
consignation alone, without need of prior tender of payment, where the ground
for consignation is that the creditor is unknown, or does not appear at the place
of payment; or is incapacitated to receive the payment at the time it is due; or
when, without just cause, he refuses to give a receipt; or when two or more
persons claim the same right to collect; or when the title of the obligation has
been lost.
On the question of jurisdiction, petitioners’ case should be tried in the Puerto
Princesa RTC, and not the HLURB. Consignation is necessarily judicial, as
Article 1258 of the New Civil Code itself provides that consignation shall be made
by depositing the thing or things due at the disposal of judicial authority. The
above provision clearly precludes consignation in venues other than the courts.
Elsewhere, what may be made is a valid tender of payment, but not consignation.
The two, however, are to be distinguished.
Tender of payment must be distinguished from consignation. Tender is the
antecedent of consignation, that is, an act preparatory to the consignation, which
is the principal, and from which are derived the immediate consequences which
the debtor desires or seeks to obtain. Tender of payment may be extrajudicial,
while consignation is necessarily judicial, and the priority of the first is the attempt
to make a private settlement before proceeding to the solemnities of
consignation. (8 Manresa 325).
While it may be true that petitioners’ claim relates to the terms and conditions of
the sale of AFPMBAI’s subdivision lot, this is overshadowed by the fact that since
the Complaint in Civil Case No. 3812 pleads a case for consignation, the HLURB
is without jurisdiction to try it, as such case may only be tried by the regular
courts.

SUBHASH C. PASRICHA and JOSEPHINE A. PASRICHA vs. DON LUIS DISON

REALTY, INC. (G.R. No. 136409, March 14, 2008)

59
What was, instead, clearly established by the evidence was petitioners’ non-
payment of rentals because ostensibly they did not know to whom payment
should be made. However, this did not justify their failure to pay, because if such
were the case, they were not without any remedy. They should have availed of
the provisions of the Civil Code of the Philippines on the consignation of payment
and of the Rules of Court on interpleader.
Section 1, Rule 62 of the Rules of Court provides:
Section 1. When interpleader proper. – Whenever conflicting claims upon
the same subject matter are or may be made against a person who claims no
interest whatever in the subject matter, or an interest which in whole or in part is
not disputed by the claimants, he may bring an action against the conflicting
claimants to compel them to interplead and litigate their several claims among
themselves.
Otherwise stated, an action for interpleader is proper when the lessee
does not know to whom payment of rentals should be made due to conflicting
claims on the property (or on the right to collect). The remedy is afforded not to
protect a person against double liability but to protect him against double
vexation in respect of one liability. Notably, instead of availing of the above
remedies, petitioners opted to refrain from making payments.

 WHEN WILL TENDER OF PAYMENT ALONE WITHOUT

CONSIGNATION PRODUCE LEGAL EFFECT?

- When tender of payment is made in the exercise of a right or privilege like in

case of exercise of the right of redemption or exercise of an option. When a
valid tender of payment is refused, the right is preserved even if there is no
subsequent consignation.

OSMEÑA III, ET. AL. vs. SOCIAL SECURITY SYSTEM OF THE PHILIPPINES
(G.R. No. 165272, September 13, 2007)

Sometime in 2003, SSS took steps to liquefy its long-term investments and
diversify them into higher-yielding and less volatile investment products. Among
its assets determined as needing to be liquefied were its shareholdings in EPCIB.
Albeit there were other interested parties, only Banco de Oro Universal Bank
(BDO) and its investment subsidiary, respondent BDO Capital, appeared in
earnest to acquire the shares in question. Following talks between them, BDO
and SSS signed, on December 30, 2003, a Letter- Agreement, for the sale and
purchase of some 187.8 million EPCIB common shares (the Shares,
hereinafter), at P43.50 per share, which represents a premium of 30% of the then
market value of the EPCIB shares. At about this time, the Shares were trading at
an average of P34.50 @ share. In the same Letter-Agreement, the parties
agreed “to negotiate in good faith a mutually acceptable Share Sale and
Purchase Agreement and execute the same not later than thirty (30) business
days from [December 30, 2003].” On April 19, 2004, the Commission on Audit
(COA), in response to respondent Dela Paz’s letter-query on the applicability of
the public bidding requirement under COA Circular No. 89-296 on the divestment
by the SSS of its entire EPICB equity holdings, stated that the “circular covers all
assets of government agencies except those merchandize or inventory held for
sale in the regular course of business.” And while it expressed the opinion that
the sale of the subject Shares are “subject to guidelines in the Circular,” the COA
qualified its determination with a statement that such negotiated sale would
partake of a stock exchange transaction and, therefore, would be adhering to the

60
general policy of public auction. Following several drafting sessions, SSS and
BDO Capital, the designated buyers of the Banco de Oro Group, agreed on a
final draft version of the Share Purchase Agreement (SPA). In it, the parties
mutually agreed to the purchase by the BDO Capital and the sale by SSS of all
the latter’s EPCIB shares at the closing date at the specified price of P43.50 per
share or a total of P8,171,383,258.50.
The proposed SPA, together with the Letter-Agreement, was then submitted to
the Department of Justice (DOJ) which, in an Opinion dated April 29, 2004,
concurred with the COA’s opinion adverted to and stated that it did not find
anything objectionable with the terms of both documents.
On July 14, 2004, SSC passed Res. No. 428 approving, as earlier stated, the
sale of the EPCIB shares through the Swiss Challenge method. Under the Swiss
Challenge format, one of the bidders is given the option or preferential “right to
match” the winning bid. Here, the “result of the bidding is subject to the right of
BDO Capital … to match the highest bid.”
Even before the bid envelopes, if any, could be opened, the herein petitioners
commenced the instant special civil action for certiorari, setting their sights
primarily on the legality of the Swiss Challenge angle. Petitioners assert, in gist,
that a public bidding with a Swiss Challenge component is contrary to COA
Circular No. 89-296 and public policy which requires adherence to competitive
public bidding in a government-contract award to assure the best price possible
for government assets. Accordingly, the petitioners urge that the planned
disposition of the Shares through a Swiss Challenge method be scrapped. As
argued, the Swiss Challenge feature tends to discourage would-be-bidders from
undertaking the expense and effort of bidding if the chance of winning is
diminished by the preferential “right to match” clause.

Pending consideration of the petition, supervening events and corporate

movements transpired. BDO and EPCIB merged. It appears that BDO, or BDO-
EPCI, Inc. to be precise, has since issued BDO common shares to respondent
SSS corresponding to the number of its former EPCIB shareholdings under the
ratio and exchange procedure prescribed in the Plan of Merger. In net effect,
SSS, once the owner of a block of EPCIB shares, is now a large stockholder of
BDO-EPCI, Inc.

We start off with the core subject of this case. As may be noted, the Letter-
Agreement, the SPA, the SSC resolutions assailed in this recourse, and the
Invitation to Bid sent out to implement said resolutions, all have a common
subject: the Shares – the 187.84 Million EPCIB common shares. It cannot be
overemphasized, however, that the Shares, as a necessary consequence of the
BDO-EPCIB merger which saw EPCIB being absorbed by the surviving BDO,
have been transferred to BDO and converted into BDO common shares under
the exchange ratio set forth in the BDO-EPCIB Plan of Merger. As thus
converted, the subject Shares are no longer equity security issuances of the now
defunct EPCIB, but those of BDO-EPCI, which, needless to stress, is a totally
separate and distinct entity from what used to be EPCIB. In net effect, therefore,
the 187.84 Million EPCIB common shares are now lost or inexistent. And in this
regard, the Court takes judicial notice of the disappearance of EPCIB stocks from
the local bourse listing. Instead, BDO-EPCI Stocks are presently listed and being
traded in the PSE.
At any rate, the moot-and-academic angle would still hold sway even if it were to
be assumed hypothetically that the subject Shares are still existing. This is so, for
the supervening BDO-EPCIB merger has so effected changes in the
circumstances of SSS and BDO/BDO Capital as to render the fulfillment of any of
the obligations that each may have agreed to undertake under either the Letter-
Agreement, the SPA or the Swiss Challenge package legally impossible. When
the service has become so difficult as to be manifestly beyond the contemplation

61
of the parties, total or partial release from a prestation and from the counter-
prestation is allowed.

Under the theory of rebus sic stantibus, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, the contract also
ceases to exist. Upon the facts obtaining in this case, it is abundantly clear that
the conditions in which SSS and BDO Capital and/or BDO executed the Letter-
Agreement upon which the pricing component – at P43.50 per share – of the
Invitation to Bid was predicated, have ceased to exist. Accordingly, the
implementation of the Letter- Agreement or of the challenged Res. Nos. 428 and
485 cannot plausibly push through, even if the central figures in this case are so
minded.

CONDONATION OR REMISSION OF DEBT – Art. 1270

1. Express Condonation – Follow the formalities of donations – Art. 1270
2. Implied Condonation – Arts. 1271, 1272, 1274
a. The delivery of a private document evidencing a credit, made voluntarily
by the creditor to the debtor, implies the renunciation of the action which
the former had against the latter (Art. 1271)
b. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it
voluntarily, unless the contrary is proved (Art. 1272)
c. It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the
possession of the debtor, or of a third person who owns the thing (Art.
1274)

RUBEN REYNA and LLOYD SORIA vs. COMMISSION ON AUDIT (G.R. No.
167219, February 8, 2011)

Write-off is not one of the legal grounds for extinguishing an obligation under the
Civil Code. It is not a compromise of liability. Neither is it a condonation, since in
condonation gratuity on the part of the obligee and acceptance by the obligor are
required. In making the write-off, only the creditor takes action by removing the
uncollectible account from its books even without the approval or participation of
the debtor.

COMPENSATION
Kinds of Compensation – Arts. 1278, 1279
a. Legal compensation – Arts. 1286-1290 (even if the parties are unaware)
b. Agreement – Art. 1282 (even if not yet due)
c. Voluntary – Art. 1282 (even if not yet due)
d. Judicial – Art. 1283 (counter-claim)
e. Facultative (only one party may claim compensation, eg. bailor,
depositor)

2. Obligations not compensable – Art. 1287-1288

62
 a. Compensation shall not be proper when one of the debts
arises from a depositum;
b. Obligations of a depositary ;
c. Bailee in commodatum;
d. Creditor who has a claim for support due by gratuitous title;
e. Taxes against payables of government.
f. If one of the debts consists in civil liability arising from a
penal offense. (n)

Case:
E.G.V. REALTY DEVELOPMENT CORPORATION and CRISTINA
CONDOMINIUM CORPORATION vs. COURT OF APPEALS and UNISHPERE
INTERNATIONAL, INC. (G.R. No. 120236. July 20, 1999)
Petitioner E.G.V. Realty Development Corporation (hereinafter referred to as
E.G.V. Realty) is the owner/developer of a seven-storey condominium building
known as Cristina Condominium. Cristina Condominium Corporation (hereinafter
referred to as CCC) holds title to all common areas of Cristina Condominium and
is in charge of managing, maintaining and administering the condominium’s
common areas and providing for the building’s security.
Respondent Unisphere International, Inc. (hereinafter referred to as Unisphere) is
the owner/occupant of Unit 301 of said condominium.
On November 28, 1981, respondent Unisphere’s Unit 301 was allegedly robbed
of various items valued at P6,165.00. The incident was reported to petitioner
CCC.
On July 25, 1982, another robbery allegedly occurred at Unit 301 where the
items carted away were valued at P6,130.00, bringing the total value of items lost
to P12,295.00. This incident was likewise reported to petitioner CCC.
On October 5, 1982, respondent Unisphere demanded compensation and
reimbursement from petitioner CCC for the losses incurred as a result of the
robbery. Petitioner CCC denied any liability for the losses claimed to have been
incurred by respondent Unisphere, stating that the goods lost belonged to
Amtrade, a third party. As a consequence of the denial, respondent Unisphere
withheld payment of its monthly dues starting November 1982. On September
13, 1983, respondent Unisphere received a letter from petitioner CCC
demanding payment of past dues.
On January 28, 1987, petitioners E.G.V. Realty and CCC jointly filed a petition
with the Securities and Exchange Commission (SEC) for the collection of the
unpaid monthly dues in the amount of P13,142.67 against respondent Unisphere.
In its answer, respondent Unisphere alleged that it could not be deemed in
default in the payment of said unpaid dues because its tardiness was occasioned
by the petitioners' failure to comply with what was incumbent upon them, that is,
to provide security for the building premises in order to prevent, if not to stop, the
robberies taking place therein. It asserted as counterclaim that the amount of
P12,295.00 representing the total value of its loss due to the two robberies be
awarded to it by way of damages for the latter’s failure to secure the premises.
ISSUE: Whether or not set-off or compensation has taken place in the instant
case.
It must be noted that Unisphere just stopped paying its monthly dues to the
Corporation on September 23, 1983 without notifying the latter. It was only on

63
February 24, 1984, or five months after, that it informed the corporation of its
suspension of payment of the condominium dues to offset the losses it suffered
because of the robberies.
In Article 1278 of the Civil Code, compensation is said to take place when two
persons, in their own right, are creditors and debtors of each other.
Compensation is “a mode of extinguishing to the concurrent amount, the
obligations of those persons who in their own right are reciprocally debtors an
creditors of each other” and “the offsetting of two obligations which are
reciprocally extinguished if they are of equal value, or extinguished to the
concurrent amount if of different values.” Article 1279 of the same Code provides:
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same quality if the latter
has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.
Absent any showing that all of these requisites exist, compensation may not take
place.
While respondent Unisphere does not deny its liability for its unpaid dues to
petitioners, the latter do not admit any responsibility for the loss suffered by the
former occasioned by the burglary. At best, what respondent Unisphere has
against petitioners is just a claim, not a debt. Such being the case, it is not
enforceable in court. It is only the debts that are enforceable in court, there being
no apparent defenses inherent in them. Respondent Unisphere’s claim for its
loss has not been passed upon by any legal authority so as to elevate it to the
level of a debt. So we held in Alfonso Vallarta v. Court of Appeals, et al., that:
Compensation or offset takes place by operation of law when two (2) persons, in
their own right, are creditor and debtor of each other. For compensation to take
place, a distinction must be made between a debt and a mere claim. A debt is a
claim which has been formally passed upon by the highest authority to which it
can in law be submitted and has been declared to be a debt. A claim, on the
other hand, is a debt in embryo. It is mere evidence of a debt and must pass thru
the process prescribed by law before it develops into what is properly called a
debt.
Tested by the foregoing yardstick, it has not been sufficiently established that
compensation or set-off is proper here as there is lack of evidence to show that
petitioners E.G.V. Realty and CCC and respondent Unisphere are mutually
debtors and creditors to each other.

NOVATION – Arts. 1291-1304

Kinds:
A. Objective or real

64
(1) Changing their object or principal conditions;

B. Subjective or personal
(2) Substituting the person of the debtor - Passive
(3) Subrogating a third person in the rights of the creditor – Active

Case of Objective Novation:

PHILIPPINE CHARTER INSURANCE CORPORATION vs. PETROLEUM
DISTRIBUTORS & SERVICE CORPORATION (G.R. No. 180898, April 18,
2012)
Surety; novation. A contract of suretyship is an agreement whereby a party,
called the surety, guarantees the performance by another party, called the
principal or obligor, of an obligation or undertaking in favor of another party,
called the obligee. Although the contract of a surety is secondary only to a valid
principal obligation, the surety becomes liable for the debt or duty of another
although it possesses no direct or personal interest over the obligations nor does
it receive any benefit therefrom. The surety’s obligation is not an original and
direct one for the performance of his own act, but merely accessory or collateral
to the obligation contracted by the principal. Nevertheless, although the contract
of a surety is in essence secondary only to a valid principal obligation, his liability
to the creditor or promisee of the principal is said to be direct, primary and
absolute; in other words, he is directly and equally bound with the principal.
A surety is released from its obligation when there is a material alteration of the
principal contract in connection with which the bond is given, such as a change
which imposes a new obligation on the promising party, or which takes away
some obligation already imposed, or one which changes the legal effect of the
original contract and not merely its form. In this case, however, no new contract
was concluded and perfected as only the revision of the work schedule originally
agreed upon was the subject thereof. There was no new contract/agreement
which could be considered to have substituted the Building Contract.

PASSIVE SUBJECTIVE NOVATION:

 In general, there are two modes of substituting the person of the debtor:
(1) expromision and (2) delegacion.

 In expromision, the initiative for the change does not come from -- and
may even be made without the knowledge of -- the debtor, since it
consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor.

 In delegacion, the debtor offers, and the creditor accepts, a third person
who consents to the substitution and assumes the obligation; thus, the
consent of these three persons are necessary.

 Both modes of substitution by the debtor require the consent of the

creditor.

Case:

S.C. MEGAWORLD CONSTRUCTION and DEVELOPMENT CORPORATION

vs. ENGR. LUIS U. PARADA (G.R. No. 183804, September 11, 2013)

65
S.C. Megaworld Construction and Development Corporation (petitioner) bought
electrical lighting materials from Gentile Industries, a sole proprietorship owned
by Engineer Luis U. Parada (respondent), for its Read-Rite project in Canlubang,
Laguna. The petitioner was unable to pay for the above purchase on due date,
but blamed it on its failure to collect under its sub-contract with the Enviro
KleenTechnologies, Inc. (Enviro Kleen). It was however able to persuade Enviro
Kleen to agree to settle its above purchase, but after paying the respondent
P250,000.00 on June 2, 1999, Enviro Kleen stopped making further payments,
leaving an outstanding balance of P816,627.00. It also ignored the various
demands of the respondent, who then filed a suit in the RTC. The petitioner in its
answer denied liability, claiming that it was released from its indebtedness to the
respondent by reason of the novation of their contract, which, it reasoned, took
place when the latter accepted the partial payment of Enviro Kleen in its behalf,
and thereby acquiesced to the substitution of Enviro Kleen as the new debtor in
the petitioner’s place.
Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. It is "the substitution of a
new contract, debt, or obligation for an existing one between the same or
different parties." Article 1293 of the Civil Code defines novation as follows:
Art. 1293. Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the
latter, but not without the consent of the creditor. Payment by the new debtor
gives him rights mentioned in Articles 1236and 1237.
Thus, in order to change the person of the debtor, the former debtor must be
expressly released from the obligation, and the third person or new debtor must
assume the former’s place in the contractual relation. Article 1293 speaks of
substitution of the debtor, which may either be in the form of expromision or
delegacion, as seems to be the case here. In both cases, the old debtor must be
released from the obligation, otherwise, there is no valid novation.
From the circumstances obtaining below, we can infer no clear and unequivocal
consent by the respondent to the release of the petitioner from the obligation to
pay the cost of the lighting materials. In fact, from the letters of the respondent to
Enviro Kleen, it can be said that he retained his option to go after the petitioner if
Enviro Kleen failed to settle the petitioner’s debt. As the trial court held:
The fact that Enviro Kleen Technologies, Inc. made payments to the respondent
and the latter accepted it does not ipso facto result in novation. Novation to be
given its legal effect requires that the creditor should consent to the substitution
of a new debtor and the old debtor be released from its obligation (Art. 1293,
New Civil Code). A reading of the letters dated 14 April 1999 (Exh. 1) and dated
16 June 1999 (Exhs. 4 &4-a) sent by the respondent to Enviro Kleen
Technologies, Inc. clearly shows that there was nothing therein that would evince
that the[respondent] has consented to the exchange of the person of the debtor
from the petitioner to Enviro Kleen Technologies, Inc.
xxxx
Notably in Exh. 1, albeit addressed to Enviro Kleen Technologies, Inc., the
respondent expressly stated that it has served notice to the petitioner that unless
the overdue account is paid, the matter will be referred to its lawyers and there
may be a pull-out of the delivered lighting fixtures. It was likewise stated therein
that incident damages that may result to the structure in the course of the pull-out
will be to the account of the petitioner.

66
It is evident from the two (2) aforesaid letters that there is no indication of the
respondent’s intention to release the petitioner from its obligation to pay and to
transfer it to Enviro Kleen Technologies, Inc. The acquiescence of Enviro Kleen
Technologies, Inc. to assume the obligation of the petitioner to pay the unpaid
balance of [P]816,627.00 to the respondent when there is clearly no agreement
to release the petitioner will result merely to the addition of debtors and not
novation. Hence, the creditor can still enforce the obligation against the original
debtor x x x. A fact which points strongly to the conclusion that the respondent
did not assent to the substitution of Enviro Kleen Technologies, Inc. as the new
debtor is the present action instituted by the respondent against the petitioner for
the fulfillment of its obligation. A mere recital that the respondent has agreed or
consented to the substitution of the debtor is not sufficient to establish the fact
that there was a novation. x x x.32
The settled rule is that novation is never presumed, but must be clearly and
unequivocally shown. In order for a new agreement to supersede the old one,
the parties to a contract must expressly agree that they are abrogating their old
contract in favor of a new one. Thus, the mere substitution of debtors will not
result innovation, and the fact that the creditor accepts payments from a third
person, who has assumed the obligation, will result merely in the addition of
debtors and not novation, and the creditor may enforce the obligation against
both debtors. If there is no agreement as to solidarity, the first and new debtors
are considered obligated jointly.

INTERPORT RESOURCES CORPORATION vs. SECURITIES SPECIALIST,

INC., AND R.C. LEE SECURITIES INC. (G.R. No. 154069, June 06, 2016)

In January 1977, Oceanic Oil & Mineral Resources, Inc. (Oceanic) entered into a
subscription agreement with R.C. Lee covering 5,000,000 of its shares with par
value of P0.01 per share, for a total of P50,000.00. Thereupon, R.C. Lee paid
25% of the subscription, leaving 75% unpaid. Consequently, Oceanic issued
Subscription Agreements Nos. 1805, 1808, 1809, 1810, and 1811 to R.C. Lee.c
hanrobleslaw

On July 28, 1978, Oceanic merged with Interport, with the latter as the surviving
corporation.

On April 16, 1979 and April 18, 1979, SSI, a domestic corporation registered as a
dealer in securities, received in the ordinary course of business Oceanic
Subscription Agreements Nos. 1805, 1808 to 1811, all outstanding in the name of
R.C. Lee, and Oceanic official receipts showing that 25% of the subscriptions
had been paid. The Oceanic subscription agreements were duly delivered to SSI
through stock assignments indorsed in blank by R.C. Lee.
cha

Later on, R.C. Lee requested Interport for a list of subscription agreements and
stock certificates issued in the name of R.C. Lee and other individuals named in
the request. In response, Interport’s Corporate Secretary, provided the requested
list of all subscription agreements of Interport and Oceanic, as well as the
requested stock certificates of Interport. Upon finding no record showing any
transfer or assignment of the Oceanic subscription agreements and stock
certificates of Interport as contained in the list, R.C. Lee paid its unpaid
subscriptions and was accordingly issued stock certificates corresponding
thereto.

67
chanrobleslaw

On February 8, 1989, Interport issued a call for the full payment of subscription
receivables, setting March 15, 1989 as the deadline. SSI tendered payment prior
to the deadline through two stockbrokers of the Manila Stock Exchange.
However, the stockbrokers reported to SSI that Interport refused to honor the
Oceanic subscriptions.
chanrobleslaw

On March 31, 1989, or 16 days after its tender of payment, SSI learned that
Interport had issued the 5,000,000 shares to R.C. Lee, relying on the latter's
registration as the owner of the subscription agreements in the books of the
former, and on the affidavit executed by the President of R.C. Lee stating that no
transfers or encumbrances of the shares had ever been made.chanrobleslaw

Thus, on April 27, 1989, SSI wrote R.C. Lee demanding the delivery of the
5,000,000 Interport shares on the basis of a purported assignment of the
subscription agreements covering the shares made in 1979. R.C. Lee failed to
return the subject shares inasmuch as it had already sold the same to other
parties. SSI thus demanded that R.C. Lee pay not only the equivalent of the 25%
it had paid on the subscription but the whole 5,000,000 shares at current market
value. cSSI also made demands upon Interport and R.C. Lee for the cancellation
of the shares issued to R.C. Lee and for the delivery of the shares to SSI.
hanrobleslaw

On October 6, 1989, after its demands were not met, SSI commenced this case
in the SEC to compel the respondents to deliver the 5,000,000 shares and to pay
damages. It alleged fraud and collusion between Interport and R.C. Lee in
rejecting the tendered payment and the transfer of the shares covered by the
subscription agreements.

Interport was liable to deliver the Oceanic shares of stock, or the value
thereof, under Subscription Agreements Nos. 1805, and 1808 to 1811 to SSI

Both respondents seek to be absolved of liability for their machinations by

invoking both the rule on novation of the debtor without the creditor's consent; as
well as the Corporation Code rule of nonregistration of transfers in the
corporation's stock and transfer book. Neither will avail in the case at bar. Art.
1293 of the New Civil Code states:

chanRoblesvirtualLawlibrary"Art. 1293. Novation which consists in substituting a

new debtor in the place of the original one may be made even without the
knowledge or against the will of the latter but not without the consent of the
creditor" x x x.

More importantly, the allusion by the respondents likening the subscription

contracts to the situation of debtor-creditor finds no basis in law. Indeed, as held
by the Supreme Court, shareholders are not creditors of the corporation with
respect to the shareholdings (Garcia vs. Lim Chu Sing, 59 Phil. 562).

The Memorandum of R.C. Lee, likewise cites the Opinion of the SEC dated
November 12, 1976, which states "that since an assignment will involve a
substitution of debtor or novation of contract, as such the consent of the creditor
must be obtained" has the same effect. The opinion, however, merely restated

68
the general rule already embodied in the Codal provision quoted above; it does
not preclude previously authorized transfers. According to Tolentino -
"When the original contract authorizes the debtor to transfer his obligations to a
third person, the novation by substitution of debtor is effected when the creditor
is notified that such transfer has been made" (IV Tolentino 392, 1991
ed, Emphasis supplied)
But even following the argument of the respondents, when complainant SSI
tendered the balance of the unpaid subscription on the subject five (5)
million shares on the basis of the existing subscription agreements
covering the same, respondents Interport was bound to accept payment
even as the same were being tendered in the name of the registered
subscriber, respondent R.C. Lee and once the payment is fully accepted in
the name of respondent R.C. Lee, respondent Interport was then bound to
recognize the stock assignment also tendered duly executed by
respondent R.C. Lee in favor of complainant SSI.
The SEC correctly categorized the assignment of the subscription agreements as
a form of novation by substitution of a new debtor and which required the
consent of or notice to the creditor. We agree. Under the Civil Code, obligations
may be modified by: (1) changing their object or principal conditions; or (2)
substituting the person of the debtor; or (3) subrogating a third person in the
rights of the creditor. Novation, which consists in substituting a new debtor in the
place of the original one, may be made even without the knowledge or against
the will of the latter, but not without the consent of the creditor. In this case, the
change of debtor took place when R.C. Lee assigned the Oceanic shares under
Subscription Agreement Nos. 1805, and 1808 to 1811 to SSI so that the latter
became obliged to settle the 75% unpaid balance on the subscription.

The SEC likewise did not err in appreciating the fact that Interport was duly
notified of the assignment when SSI tendered its payment for the 75% unpaid
balance, and that it could not anymore refuse to recognize the transfer of the
subscription that SSI sufficiently established by documentary evidence.

Yet, Interport claims that SSI waived its rights over the 5,000,000 shares due to
its failure to register the assignment in the books of Interport; and that SSI was
estopped from claiming the assigned shares, inasmuch as the assignor, R.C.
Lee, had already transferred the same to third parties.

Interport's claim cannot be upheld. It should be stressed that novation

extinguished an obligation between two parties.
Clearly, the effect of the assignment of the subscription agreements to SSI was to
extinguish the obligation of R.C. Lee to Oceanic, now Interport, to settle the
unpaid balance on the subscription. As a result of the assignment, Interport was
no longer obliged to accept any payment from R.C. Lee because the latter had
ceased to be privy to Subscription Agreements Nos. 1805, and 1808 to 1811 for
having been extinguished insofar as it was concerned. On the other hand,
Interport was legally bound to accept SSI's tender of payment for the 75%
balance on the subscription price because SSI had become the new debtor
under Subscription Agreements Nos. 1805, and 1808 to 1811. As such, the
issuance of the stock certificates in the name of R.C. Lee had no legal basis in
the absence of a contractual agreement between R.C. Lee and Interport.

TUAZON vs. DEL ROSARIO-SUAREZ, ET. AL. (G.R. No. 168325, December 8,
2010)

69
On June 24, 1994, petitioner Roberto D. Tuazon (Roberto) and Lourdes executed a
Contract of Lease over the abovementioned parcel of land for a period of three years.
The lease commenced in March 1994 and ended in February 1997. During the
effectivity of the lease, Lourdes sent a letter dated January 2, 1995 to Roberto where
she offered to sell to the latter subject parcel of land. She pegged the price at
P37,541,000.00 and gave him two years from January 2, 1995 to decide on the said
offer. On June 19, 1997, or more than four months after the expiration of the Contract
of Lease, Lourdes sold subject parcel of land to her only child, Catalina Suarez-De
Leon, her son-in-law Wilfredo De Leon, and her two grandsons, Miguel Luis S. De Leon
and Rommel S. De Leon (the De Leons), for a total consideration of only
P2,750,000.00 as evidenced by a Deed of Absolute Sale executed by the parties. TCT
No. 177986 was then issued by the Registry of Deeds of Quezon City in the name of
the De Leons.
Roberto claims that Lourdes violated his right to buy subject property under the principle
of “right of first refusal” by not giving him “notice” and the opportunity to buy the property
under the same terms and conditions or specifically based on the much lower price paid
by the De Leons. Roberto further contends that he is enforcing his “right of first refusal”
based on Equatorial Realty Development, Inc. v. Mayfair Theater, Inc. which is the
leading case on the “right of first refusal.”
HELD:
An option contract is entirely different and distinct from a right of first refusal in that in the
former, the option granted to the offeree is for a fixed period and at a determined
price. Lacking these two essential requisites, what is involved is only a right of first
refusal. In this case, the controversy is whether the letter of Lourdes to Roberto dated
January 2, 1995 involved an option contract or a contract of a right of first refusal. In its
entirety, the said letter-offer reads:

Dear Mr. Tuazon,

I received with great joy and happiness the big box of sweet grapes and ham, fit
for a king’s party. Thanks very much.

I am getting very old (79 going 80 yrs. old) and wish to live in the
U.S.A. with my only family. I need money to buy a house and lot and a
farm with a little cash to start.

I am offering you to buy my 1211 square meter at

P37,541,000.00 you can pay me in dollars in the name of my daughter. I
never offered it to anyone. Please shoulder the expenses for the transfer.
I wish the Lord God will help you buy my lot easily and you will be very
lucky forever in this place. You have all the time to decide when you
can, but not for 2 years or more.

I wish you long life, happiness, health, wealth and great fortune
always!

I hope the Lord God will help you be the recipient of multi-billion
projects aid from other countries.
Thank you,
Lourdes Q. del Rosario vda de
Suarez

70
 It is clear that the above letter embodies an option contract as it grants Roberto
a fixed period of only two years to buy the subject property at a price certain of
P37,541,000.00. It being an option contract, the rules applicable are found in Articles
1324 and 1479 of the Civil Code which provide:

Art. 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when the option
is founded upon a consideration, as something paid or promised.

Art. 1479. A promise to buy and sell a determinate thing for a

price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate

thing for a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.

It is clear from the provision of Article 1324 that there is a great difference between the
effect of an option which is without a consideration from one which is founded upon a
consideration. If the option is without any consideration, the offeror may withdraw his
offer by communicating such withdrawal to the offeree at anytime before acceptance; if
it is founded upon a consideration, the offeror cannot withdraw his offer before the lapse
of the period agreed upon. The second paragraph of Article 1479 declares that “an
accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissor if the promise is supported by a consideration distinct from
the price.” Sanchez v. Rigos provided an interpretation of the said second paragraph
of Article 1479 in relation to Article 1324. Thus:
There is no question that under Article 1479 of the new Civil Code "an option to sell," or
"a promise to buy or to sell," as used in said article, to be valid must be "supported by a
consideration distinct from the price." This is clearly inferred from the context of said
article that a unilateral promise to buy or to sell, even if accepted, is only binding if
supported by consideration. In other words, "an accepted unilateral promise can only
have a binding effect if supported by a consideration, which means that the option can
still be withdrawn, even if accepted, if the same is not supported by any consideration.
Hence, it is not disputed that the option is without consideration. It can therefore be
withdrawn notwithstanding the acceptance made of it by appellee.
It is true that under Article 1324 of the new Civil Code, the general
rule regarding offer and acceptance is that, when the offerer gives to the
offeree a certain period to accept, "the offer may be withdrawn at any
time before acceptance" except when the option is founded upon
consideration, but this general rule must be interpreted as modified by
the provision of Article 1479 above referred to, which applies to "a
promise to buy and sell" specifically. As already stated, this rule requires
that a promise to sell to be valid must be supported by a consideration
distinct from the price.

In Diamante v. Court of Appeals, this Court further declared that:

A unilateral promise to buy or sell is a mere offer, which is not

converted into a contract except at the moment it is accepted.
Acceptance is the act that gives life to a juridical obligation,

71
 because, before the promise is accepted, the promissor may
withdraw it at any time. Upon acceptance, however, a bilateral contract
to sell and to buy is created, and the offeree ipso facto assumes the
obligations of a purchaser; the offeror, on the other hand, would be liable
for damages if he fails to deliver the thing he had offered for sale.

xxxx

Even if the promise was accepted, private respondent was

not bound thereby in the absence of a distinct consideration.
(Emphasis ours.)

In this case, it is undisputed that Roberto did not accept the terms stated in the
letter of Lourdes as he negotiated for a much lower price. Roberto’s act of negotiating
for a much lower price was a counter-offer and is therefore not an acceptance of the
offer of Lourdes. Article 1319 of the Civil Code provides:

Consent is manifested by the meeting of the offer and the

acceptance upon the thing and the cause which are to constitute the
contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer. (Emphasis
supplied.)

The counter-offer of Roberto for a much lower price was not accepted by
Lourdes. There is therefore no contract that was perfected between them with regard to
the sale of subject property. Roberto, thus, does not have any right to demand that the
property be sold to him at the price for which it was sold to the De Leons neither does
he have the right to demand that said sale to the De Leons be annulled.

It is the position of Roberto that the facts of this case and that of Equatorial are
similar in nearly all aspects. Roberto is a lessee of the property like Mayfair Theater in
Equatorial. There was an offer made to Roberto by Lourdes during the effectivity of the
contract of lease which was also the case in Equatorial. There were negotiations as to
the price which did not bear fruit because Lourdes sold the property to the De Leons
which was also the case in Equatorial wherein Carmelo and Bauermann sold the
property to Equatorial. The existence of the lease of the property is known to the De
Leons as they are related to Lourdes while in Equatorial, the lawyers of Equatorial
studied the lease contract of Mayfair over the property. The property in this case was
sold by Lourdes to the De Leons at a much lower price which is also the case in
Equatorial where Carmelo and Bauerman sold to Equatorial at a lesser price. It is
Roberto’s conclusion that as in the case of Equatorial, there was a violation of his right
of first refusal and hence annulment or rescission of the Deed of Absolute Sale is the
proper remedy.
Roberto’s reliance in Equatorial is misplaced. Despite his claims, the facts in
Equatorial radically differ from the facts of this case. Roberto overlooked the fact that in
Equatorial, there was an express provision in the Contract of Lease that –
(i)f the LESSOR should desire to sell the leased properties, the
LESSEE shall be given 30-days exclusive option to purchase the same.
There is no such similar provision in the Contract of Lease between Roberto and
Lourdes. What is involved here is a separate and distinct offer made by Lourdes
through a letter dated January 2, 1995 wherein she is selling the leased property to
Roberto for a definite price and which gave the latter a definite period for acceptance.
Roberto was not given a right of first refusal. The letter-offer of Lourdes did not form

72
part of the Lease Contract because it was made more than six months after the
commencement of the lease.
It is also very clear that in Equatorial, the property was sold within the lease period. In
this case, the subject property was sold not only after the expiration of the period
provided in the letter-offer of Lourdes but also after the effectivity of the Contract of
Lease.
Moreover, even if the offer of Lourdes was accepted by Roberto, still the former is not
bound thereby because of the absence of a consideration distinct and separate from
the price. The argument of Roberto that the separate consideration was the liberality on
the part of Lourdes cannot stand. A perusal of the letter-offer of Lourdes would show
that what drove her to offer the property to Roberto was her immediate need for funds
as she was already very old. Offering the property to Roberto was not an act of
liberality on the part of Lourdes but was a simple matter of convenience and practicality
as he was the one most likely to buy the property at that time as he was then leasing
the same.

PHILIPPINE NATIONAL OIL COMPANY AND PNOC DOCKYARD &

ENGINEERING CORPORATION vs. KEPPEL PHILIPPINES HOLDINGS, INC.
(G.R. No. 202050, July 25, 2016)

Almost 40 years ago or on 6 August 1976, the respondent Keppel Philippines

Holdings, Inc. (Keppel) entered into a lease agreement (the agreement) with
Luzon Stevedoring Corporation (Lusteveco) covering 11 hectares of land located
in Bauan, Batangas. The lease was for a period of 25 years for a consideration of
P2.1 million. At the option of Lusteveco, the rental fee could be totally or partially
converted into equity shares in Keppel. At the end of the 25-year Jease period,
Keppel was given the "firm and absolute option to purchase the land for P4.09
million, provided that it had acquired the necessary qualification to own land
under Philippine laws at the time the option is exercised. Apparently, when the
lease agreement was executed, less than 60% of Keppel's shareholding was
Filipino-owned, hence, it was not constitutionally qualified to acquire private lands
in the country. If, at the end of the 25-year lease period (or in 2001), Keppel
remained unqualified to own private lands, the agreement provided that the lease
would be automatically renewed for another 25 years. Keppel was further
allowed to exercise the option to purchase the land up to the 30th year of the
lease (or in 2006), also on the condition that, by then, it would have acquired the
requisite qualification to own land in the Philippines.

The option is incorporated as paragraph 5 of the Agreement and reads as:

4. If within the period of the first [25] years [Keppel] becomes qualified
to own land under the laws of the Philippines, it has the firm and
absolute option to purchase the above property for a total price of
[P-4,090,000.00] at the end of the 25th year, discounted at 16%
annual for every year before the end of the 25th year, which amount
may be converted into equity of [Keppel] at book value prevailing at
the time of sale, or paid in cash at Lusteveco's option.

5. However, if after the first [25] years, [Keppel] is still not qualified to
own land under the laws of the Republic of the Philippines,
[Keppel's] lease of the above stated property shall be automatically
renewed for another [25] years, under the same terms and
conditions save for the rental price which shall be for the sum of

73
 P4,090,000.00... and which sum may be totally converted into equity
of [Keppel] at book value prevailing at the time of conversion, or
paid in cash at Lusteveco's option.

If anytime within the second [25] years up to the [30th] year from the
date of this agreement, [Keppel] becomes qualified to own land
under the laws of the Republic of the Philippines, [Keppel] has the
firm and absolute option to buy and Lusteveco hereby undertakes to
sell the above stated property for the nominal consideration of
[P100.00.00]...”

Together with Keppel's lease rights and option to purchase, Lusteveco warranted
not to sell the land or assign its rights to the land for the duration of the lease
unless with the prior written consent of Keppel. When the Philippine National Oil
Corporation (PNOC) acquired the land from Lusteveco and took over the rights
and obligations under the agreement, Keppel did not object to the assignment so
long as the agreement was annotated on PNOC's title. With PNOC's consent
and cooperation, the agreement was recorded as Entry No. 65340 on PNOC's
Transfer of Certificate of Title No. T-50724.

On 8 December 2000, Keppel wrote PNOC informing the latter that at least 60%
of its shares were now owned by Filipinos. Consequently, Keppel expressed its
readiness to exercise its option to purchase the land. Keppel reiterated its
demand to purchase the land several times, but on every occasion, PNOC did
not favourably respond. To compel PNOC to comply with the Agreement, Keppel
instituted a complaint for specific performance with the RTC on 26 September
2003 against PNOC. PNOC countered Keppel's claims by contending that the
agreement was illegal for circumventing the constitutional prohibition against
aliens holding lands in the Philippines. It further asserted that the option contract
was void, as it was unsupported by a separate valuable consideration. It also
claimed that it was not privy to the agreement. Keppel counters that a separate
consideration is not necessary to support its option to buy because the option is
one of the stipulations of the lease contract. It claims that a separate
consideration is required only when an option to buy is embodied in an
independent contract.

In the present case, paragraph 5 of the agreement provided that should Keppel
exercise its option to buy, Lusteveco could opt to convert the purchase price into
equity in Keppel. May Lusteveco's option to convert the price for shares be
deemed as a sufficient separate consideration for Keppel's option to buy?

In the present case, none of the above rules were observed. We find nothing in
paragraph 5 of the Agreement indicating that the grant to Lusteveco of the option
to convert the purchase price for Keppel shares was intended by the parties as
the consideration for Keppel's option to buy the land; Keppel itself as the offeree
presented no evidence to support this finding. On the contrary, the option to
convert the purchase price for shares should be deemed part of the
consideration for the contract of sale itself, since the shares are merely an
alternative to the actual cash price.

For uniformity and consistency in contract interpretation, the better rule to

follow is that the consideration for the option contract should be clearly
specified as such in the option contract or clause. Otherwise, the offeree
must bear the burden of proving that a separate consideration for the
option contract exists. Given our finding that the Agreement did not

74
categorically refer to any consideration to support Keppel's option to buy
and for Keppel's failure to present evidence in this regard, we cannot
uphold the existence of an option contract in this case.

Accordingly, when an option to buy or to sell is not supported by a consideration

separate from the purchase price, the option constitutes as an offer to buy or to
sell, which may be withdrawn by the offeror at any time prior to the
communication of the offeree's acceptance. When the offer is duly accepted, a
mutual promise to buy and to sell under the first paragraph of Article 1479 of the
Civil Code ensues and the parties' respective obligations become reciprocally
demandable. Applied to the present case, we find that the offer to buy the land
was timely accepted by Keppel. As early as 1994, Keppel expressed its desire
to exercise its option to buy the land. Instead of rejecting outright Keppel's
acceptance, PNOC referred the matter to the Office of the Government
Corporate Counsel (OGCC). In its Opinion No. 160, series of 1994, the OGCC
opined that Keppel "did not yet have the right to purchase the Bauan lands." On
account of the OGCC opinion, the PNOC did not agree with Keppel's attempt to
buy the land; nonetheless, the PNOC made no categorical withdrawal of the
offer to sell provided under the Agreement. By 2000, Keppel had met the
required Filipino equity proportion and duly communicated its acceptance of the
offer to buy to PNOC. Keppel met with the board of directors and officials of
PNOC who interposed no objection to the sale. It was only when the amount of
purchase price was raised that the conflict between the parties arose, with PNOC
backtracking in its position and questioning the validity of the option. Thus, when
Keppel communicated its acceptance, the offer to purchase the Bauan land
stood, not having been withdrawn by PNOC. The offer having been duly
accepted, a contract to sell the land ensued which Keppel can rightfully
demand PNOC to comply with.

METROPOLITAN BANK AND TRUST COMPANY, SUBSTITUTED BY

MERIDIAN CORPORATION vs. INTERNATIONAL EXCHANGE
BANK/CHUAYUCO STEEL MANUFACTURING vs. INTERNATIONAL
EXCHANGE BANK (G.R. No. 176008/G.R. No. 176131, August 10, 2011)

The following successive measures must be taken by a creditor before he may

bring an action for rescission of an allegedly fraudulent contract: (1) exhaust the
properties of the debtor through levying by attachment and execution upon all the
property of the debtor, except such as are exempt by law from execution; (2)
exercise all the rights and actions of the debtor, save those personal to him
(accion subrogatoria); and (3) seek rescission of the contracts executed by the
debtor in fraud of their rights (accion pauliana).

It does not appear that Metrobank sought other properties of SSC other than the
subject lots alleged to have been transferred in fraud of creditors. Neither is there
any showing that Metrobank subrogated itself in SSC's transmissible rights and
actions. Without availing of the first and second remedies, Metrobank simply
undertook the third measure and filed an action for annulment of the chattel
mortgages. This cannot be done. Article 1383 of the New Civil Code is very
explicit that the right or remedy of the creditor to impugn the acts which the
debtor may have done to defraud them is subsidiary in nature. It can only be
availed of in the absence of any other legal remedy to obtain reparation for the
injury.

THE ROMAN CATHOLIC CHURCH vs. PANTE (G.R. No. 174118, April 11,
2012)

75
The Church, represented by the Archbishop of Caceres, owned a 32-square
meter lot that measured 2x16 meters located in Barangay Dinaga, Canaman,
Camarines Sur. On September 25, 1992, the Church contracted with respondent
Regino Pante for the sale of the lot on the belief that the latter was an actual
occupant of the lot. On June 28, 1994, the Church sold in favor of the spouses
Nestor and Fidela Rubi (spouses Rubi) a 215-square meter lot that included the
lot previously sold to Pante. The spouses Rubi asserted their ownership by
erecting a concrete fence over the lot sold to Pante, effectively blocking Pante
and his family’s access from their family home to the municipal road. As no
settlement could be reached between the parties, Pante instituted with the RTC
an action to annul the sale between the Church and the spouses Rubi, insofar as
it included the lot previously sold to him.
The Church filed its answer with a counterclaim, seeking the annulment of its
contract with Pante. The Church alleged that its consent to the contract was
obtained by fraud when Pante, in bad faith, misrepresented that he had been an
actual occupant of the lot sold to him, when in truth, he was merely using the 32-
square meter lot as a passageway from his house to the town proper. It
contended that it was its policy to sell its lots only to actual occupants. Since the
spouses Rubi and their predecessors-in-interest have long been occupying the
215-square meter lot that included the 32-square meter lot sold to Pante, the
Church claimed that the spouses Rubi were the rightful buyers.

RULING:

Not every mistake renders a contract voidable. For mistake as to the

qualification of one of the parties to vitiate consent, two requisites must concur:
1. the mistake must be either with regard to the identity or with regard to
the qualification of one of the contracting parties; and
2. the identity or qualification must have been the principal consideration
for the celebration of the contract.
In the present case, the Church contends that its consent to sell the lot was given
on the mistaken impression arising from Pante’s fraudulent misrepresentation
that he had been the actual occupant of the lot. Willful misrepresentation existed
because of its policy to sell its lands only to their actual occupants or residents.
Thus, it considers the buyer’s actual occupancy or residence over the subject lot
a qualification necessary to induce it to sell the lot. Contrary to the Church’s
contention, the actual occupancy or residency of a buyer over the land does not
appear to be a necessary qualification that the Church requires before it could
sell its land. Had this been indeed its policy, then neither Pante nor the spouses
Rubi would qualify as buyers of the 32-square meter lot, as none of them actually
occupied or resided on the lot. We note in this regard that the lot was only a
2x16-meter strip of rural land used as a passageway from Pante’s house to the
municipal road. We find well-taken Pante’s argument that, given the size of the
lot, it could serve no other purpose than as a mere passageway; it is unthinkable
to consider that a 2x16-meter strip of land could be mistaken as anyone’s
residence. In fact, the spouses Rubi were in possession of the adjacent lot, but
they never asserted possession over the 2x16-meter lot when the 1994 sale was
made in their favor; it was only then that they constructed the concrete fence
blocking the passageway. We find it unlikely that Pante could successfully
misrepresent himself as the actual occupant of the lot; this was a fact that the
Church (which has a parish chapel in the same barangay where the lot was
located) could easily verify had it conducted an ocular inspection of its own

76
property. The surrounding circumstances actually indicate that the Church was
aware that Pante was using the lot merely as a passageway. The above facts, in
our view, establish that there could not have been a deliberate, willful, or
fraudulent act committed by Pante that misled the Church into giving its
consent to the sale of the subject lot in his favor. That Pante was not an
actual occupant of the lot he purchased was a fact that the Church either ignored
or waived as a requirement. In any case, the Church was by no means led to
believe or do so by Pante’s act; there had been no vitiation of the Church’s
consent to the sale of the lot to Pante.
From another perspective, any finding of bad faith, if one is to be made, should
be imputed to the Church. Without securing a court ruling on the validity of its
contract with Pante, the Church sold the subject property to the spouses Rubi.
Article 1390 of the Civil Code declares that voidable contracts are binding, unless
annulled by a proper court action. From the time the sale to Pante was made
and up until it sold the subject property to the spouses Rubi, the Church made no
move to reject the contract with Pante; it did not even return the down payment
he paid. The Church’s bad faith in selling the lot to Rubi without annulling its
contract with Pante negates its claim for damages.
In the absence of any vitiation of consent, the contract between the Church and
Pante stands valid and existing. Any delay by Pante in paying the full price could
not nullify the contract, since (as correctly observed by the CA) it was a contract
of sale. By its terms, the contract did not provide a stipulation that the Church
retained ownership until full payment of the price. The right to repurchase given
to the Church in case Pante fails to pay within the grace period provided would
have been unnecessary had ownership not already passed to Pante.

STATUTE OF FRAUDS
THE MUNICIPALITY OF HAGONOY, BULACAN vs. HON. SIMEON P.
DUMDUM, JR. (G.R. No. 168289, March 22, 2010)
Statute of Frauds found in paragraph (2), Article 1403 of the Civil Code, requires
for enforceability certain contracts enumerated therein to be evidenced by some
note or memorandum. The term "Statute of Frauds" is descriptive of statutes that
require certain classes of contracts to be in writing; and that do not deprive the
parties of the right to contract with respect to the matters therein involved, but
merely regulate the formalities of the contract necessary to render it enforceable.
In other words, the Statute of Frauds only lays down the method by which the
enumerated contracts may be proved. But it does not declare them invalid
because they are not reduced to writing inasmuch as, by law, contracts are
obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. The object is to prevent fraud
and perjury in the enforcement of obligations depending, for evidence thereof, on
the unassisted memory of witnesses by requiring certain enumerated contracts
and transactions to be evidenced by a writing signed by the party to be charged.
The effect of noncompliance with this requirement is simply that no action can be
enforced under the given contracts. If an action is nevertheless filed in court, it
shall warrant a dismissal under Section 1(i), Rule 16 of the Rules of Court, unless
there has been, among others, total or partial performance of the obligation on
the part of either party.

77
CAN THE DEFENSE UNDER THE STATUTE OF FRAUDS BE WAIVED OR
RATIFIED?
 YES. Contracts infringing the Statute of Frauds, referred to in No. 2 of
article 1403, are ratified by the failure to object to the presentation of oral
evidence to prove the same, or by the acceptance of benefit under them.
(Art. 1405)

ANTHONY ORDUÑA vs. EDUARDO J. FUENTEBELLA (G.R. No. 176841, June

29, 2010)
Statute of Frauds Inapplicable to Partially Executed Contracts
The Statute of Frauds expressed in Article 1403, par. (2), of the Civil Code
applies only to executory contracts, i.e., those where no performance has yet
been made. Stated a bit differently, the legal consequence of non-compliance
with the Statute does not come into play where the contract in question is
completed, executed, or partially consummated.
The Statute of Frauds, in context, provides that a contract for the sale of real
property or of an interest therein shall be unenforceable unless the sale or some
note or memorandum thereof is in writing and subscribed by the party or his
agent. However, where the verbal contract of sale has been partially executed
through the partial payments made by one party duly received by the vendor, as
in the present case, the contract is taken out of the scope of the Statute.
The purpose of the Statute is to prevent fraud and perjury in the enforcement of
obligations depending for their evidence on the unassisted memory of witnesses,
by requiring certain enumerated contracts and transactions to be evidenced by a
writing signed by the party to be charged. The Statute requires certain contracts
to be evidenced by some note or memorandum in order to be enforceable. The
term "Statute of Frauds" is descriptive of statutes that require certain classes of
contracts to be in writing. The Statute does not deprive the parties of the right to
contract with respect to the matters therein involved, but merely regulates the
formalities of the contract necessary to render it enforceable.
Since contracts are generally obligatory in whatever form they may have been
entered into, provided all the essential requisites for their validity are present, the
Statute simply provides the method by which the contracts enumerated in Art.
1403 (2) may be proved but does not declare them invalid because they are not
reduced to writing. In fine, the form required under the Statute is for convenience
or evidentiary purposes only.
There can be no serious argument about the partial execution of the sale in
question. The records show that petitioners had, on separate occasions, given
Gabriel Sr. and Gabriel Jr. sums of money as partial payments of the purchase
price. These payments were duly receipted by Gabriel Jr. To recall, in his letter of
May 1, 1997, Gabriel, Jr. acknowledged having received the aggregate payment
of PhP 65,000 from petitioners with the balance of PhP 60,000 still remaining
unpaid. But on top of the partial payments thus made, possession of the subject
of the sale had been transferred to Antonita as buyer. Owing thus to its partial
execution, the subject sale is no longer within the purview of the Statute of
Frauds.
Lest it be overlooked, a contract that infringes the Statute of Frauds is ratified by
the acceptance of benefits under the contract. Evidently, Gabriel, Jr., as his father
earlier, had benefited from the partial payments made by the petitioners. Thus,
neither Gabriel Jr. nor the other respondents—successive purchasers of subject
lots—could plausibly set up the Statute of Frauds to thwart petitioners’ efforts

78
towards establishing their lawful right over the subject lot and removing any cloud
in their title. As it were, petitioners need only to pay the outstanding balance of
the purchase price and that would complete the execution of the oral sale.

FUENTES vs. ROCA (G.R. No. 178902, April 21, 2010)

This case is about a husband’s sale of conjugal real property, employing a

challenged affidavit of consent from an estranged wife. The buyers claim valid
consent, loss of right to declare nullity of sale, and prescription.

HELD: Contrary to the ruling of the Court of Appeals, the law that applies to this
case is the Family Code, not the Civil Code. Although Tarciano and Rosario got
married in 1950, Tarciano sold the conjugal property to the Fuentes spouses on
January 11, 1989, a few months after the Family Code took effect on August 3,
1988.

When Tarciano married Rosario, the Civil Code put in place the system of
conjugal partnership of gains on their property relations. While its Article 165
made Tarciano the sole administrator of the conjugal partnership, Article 166
prohibited him from selling commonly owned real property without his wife’s
consent. Still, if he sold the same without his wife’s consent, the sale is not void
but merely voidable. Article 173 gave Rosario the right to have the sale annulled
during the marriage within ten years from the date of the sale. Failing in that, she
or her heirs may demand, after dissolution of the marriage, only the value of the
property that Tarciano fraudulently sold. But, as already stated, the Family Code
took effect on August 3, 1988. Its Chapter 4 on Conjugal Partnership of Gains
expressly superseded Title VI, Book I of the Civil Code on Property Relations
Between Husband and Wife. Further, the Family Code provisions were also
made to apply to already existing conjugal partnerships without prejudice to
vested rights. Consequently, when Tarciano sold the conjugal lot to the Fuentes
spouses on January 11, 1989, the law that governed the disposal of that lot was
already the Family Code.

In contrast to Article 173 of the Civil Code, Article 124 of the Family Code does
not provide a period within which the wife who gave no consent may assail her
husband’s sale of the real property. It simply provides that without the other
spouse’s written consent or a court order allowing the sale, the same would be
void.

Under the provisions of the Civil Code governing contracts, a void or inexistent
contract has no force and effect from the very beginning. And this rule applies to
contracts that are declared void by positive provision of law, as in the case of a
sale of conjugal property without the other spouse’s written consent. A void
contract is equivalent to nothing and is absolutely wanting in civil effects. It
cannot be validated either by ratification or prescription.

But, although a void contract has no legal effects even if no action is taken to set
it aside, when any of its terms have been performed, an action to declare its
inexistence is necessary to allow restitution of what has been given under it.
This action, according to Article 1410 of the Civil Code does not prescribe. Here,
the Rocas filed an action against the Fuentes spouses in 1997 for annulment of
sale and reconveyance of the real property that Tarciano sold without their
mother’s (his wife’s) written consent. The passage of time did not erode the right
to bring such an action.

79
Vicente Manzano, Jr. vs. Marcelino Garcia (G.R. No. 179323, November 28,
2011)

At this point, however, we should clarify that the proper basis for the nullity of the
forged pacto de retro sale is not Article 1409 (which enumerates examples of
void contracts) in relation to Article 1505 (which refers to an unenforceable
contract and is applicable only to goods) of the Civil Code as stated by the Court
of Appeals, but Article 1318 of the Civil Code, which enumerates the essential
requisites of a valid contract:
Article 1318. There is no contract unless the following requisites concur:

(1) Consent of the contracting parties;

(2) Object certain which is the subject matter of the

contract;

(3) Cause of the obligation which is established.

There are two types of void contracts: (1) those where one of the essential
requisites of a valid contract as provided for by Article 1318 of the Civil Code is
totally wanting; and (2) those declared to be so under Article 1409 of the Civil
Code. [C]onveyances by virtue of a forged signature x x x are void ab initio. The
absence of the essential [requisites] of consent and cause or consideration in
these cases rendered the contract inexistent. x x x.
Contracts; void contract; effects. Under Article 1409 (1) of the Civil Code, a
contract whose cause, object or purpose is contrary to law is a void or inexistent
contract. As such, a void contract cannot produce a valid one. To the same effect
is Article 1422 of the Civil Code, which declares that “a contract, which is the
direct result of a previous illegal contract, is also void and inexistent.” Domingo
Gonzalo v. John Tarnate, Jr., G.R. No. 160600, January 15, 2014.

DISTINCTIONS BETWEEN THE 4 DEFECTIVE CONTRACTS

Rescissible Voidable Unenforceable Void

Existence Valid Valid Valid Does not exist

Enforceability Enforceable Enforceable Not Not

Susceptibility Yes Yes Yes No

to Ratification
or Waiver

Action by Yes No No Yes, as long

Third Persons as directly
affected

Readily No. It is Yes Yes Yes

invoked? subsidiary

80
Prescription Prescribes in Prescribes in No No
4 years 4 years prescription prescription

EFFECT OF CONTRACTS – ART. 1311

LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL

CORPORATION, vs. HUANG CHAO CHUM (G.R. No. 142378. March 7, 2002)
A stipulation in a lease contract stating that its five-year term is subject to "an
option to renew" shall be interpreted to be reciprocal in character. Unless the
language shows an intent to allow the lessee to exercise it unilaterally, such
option shall be deemed to benefit both the lessor and the lessee who must both
consent to the extension or renewal, as well as to its specific terms and
conditions.

ALLIED BANKING CORPORATION vs. COURT OF APPEALS (G.R. No. 124290

January 16, 1998)
ISSUE: Whether a stipulation in a contract of lease to the effect that the contract
"may be renewed for a like term at the option of the lessee" is void for being
potestative or violative of the principle of mutuality of contracts under Art. 1308 of
the Civil Code.
HELD: It is valid.
Article 1308 of the Civil Code expresses what is known in law as the principle of
mutuality of contracts. It provides that "the contract must bind both the
contracting parties; its validity or compliance cannot be left to the will of one of
them." This binding effect of a contract on both parties is based on the principle
that the obligations arising from the contracts have the force of law between the
contracting parties, and there must be mutuality between them based essentially
on their equality under which it is repugnant to have one party bound by the
contract while leaving the other free therefrom. The ultimate purpose is to render
void a contract containing a condition which makes its fulfillment dependent
solely upon the uncontrolled will of one of the contracting parties.
An express agreement which gives the lessee the sole option to renew the lease
is frequent and subject to statutory restrictions, valid and binding on the parties.
This option, which is provided in the same lease agreement, is fundamentally
part of the consideration in the contract and is no different from any other
provision of the lease carrying an undertaking on the part of the lessor to act
conditioned on the performance by the lessee. It is a purely executory contract
and at most confers a right to obtain a renewal if there is compliance with the
conditions on which the rights is made to depend. The right of renewal
constitutes a part of the lessee's interest in the land and forms a substantial and
integral part of the agreement.
The fact that such option is binding only on the lessor and can be exercised only
by the lessee does not render it void for lack of mutuality. After all, the lessor is
free to give or not to give the option to the lessee. And while the lessee has a
right to elect whether to continue with the lease or not, once he exercises his
option to continue and the lessor accepts, both parties are thereafter bound by
the new lease agreement. Their rights and obligations become mutually fixed,
and the lessee is entitled to retain possession of the property for the duration of
the new lease, and the lessor may hold him liable for the rent therefor. The
lessee cannot thereafter escape liability even if he should subsequently decide to
abandon the premises. Mutuality obtains in such a contract and equality exists

81
between the lessor and the lessee since they remain with the same faculties in
respect to fulfillment.
The case of Lao Lim v. Court of Appeals relied upon by the trial court is not
applicable here. In that case, the stipulation in the disputed compromise
agreement was to the effect that the lessee would be allowed to stay in the
premises "as long as he needs it and can pay the rents." In the present case, the
questioned provision states that the lease "may be renewed for a like term at the
option of the lessee." The lessor is bound by the option he has conceded to the
lessee. The lessee likewise becomes bound only when he exercises his option
and the lessor cannot thereafter be executed from performing his part of the
agreement.
With respect to the meaning of the clause "may be renewed for a like term at the
option of the lessee," we sustain petitioner's contention that its exercise of the
option resulted in the automatic extension of the contract of lease under the
same terms and conditions. The subject contract simply provides that "the term
of this lease shall be fourteen (14) years and may be renewed for a like term at
the option of the lessee." As we see it, the only term on which there has been a
clear agreement is the period of the new contract, i.e., fourteen (14) years, which
is evident from the clause "may be renewed for a like term at the option of the
lessee," the phrase "for a like term" referring to the period. It is silent as to what
the specific terms and conditions of the renewed lease shall be. Shall it be the
same terms and conditions as in the original contract, or shall it be under the
terms and conditions as may be mutually agreed upon by the parties after the
expiration of the existing lease?
In Ledesma v. Javellana this Court was confronted with a similar problem. In the
case the lessee was given the sole option to renew the lease, but the contract
failed to specify the terms and conditions that would govern the new contract.
When the lease expired, the lessee demanded an extension under the same
terms and conditions. The lessor expressed conformity to the renewal of the
contract but refused to accede to the claim of the lessee that the renewal should
be under the same terms and conditions as the original contract.
The settled rule is that in case of uncertainty as to the meaning of a provision
granting extension to a contract of lease, the tenant is the one favored and not
the landlord. "As a general rule, in construing provisions relating to renewals or
extensions, where there is any uncertainty, the tenants is favored, and not the
landlord, because the latter, having the power of stipulating in his own favor, has
neglected to do so; and also upon the principle that every man's grant is to be
taken most strongly against himself (50 Am Jur. 2d, Sec. 1162, p. 48; see also 51
C.J.S. 599).
Besides, if we were to adopt the contrary theory that the terms and conditions to
be embodied in the renewed contract were still subject to mutual agreement by
and between the parties, then the option which is an integral part of the
consideration for the contract would be rendered worthless. For then, the lessor
could easily defeat the lessee's right of renewal by simply imposing unreasonable
and onerous conditions to prevent the parties from reaching an agreement, as in
the case at bar. As in a statute no word, clause, sentence, provision or part of a
contract shall be considered surplusage or superfluous, meaningless, void,
insignificant or nugatory, if that can be reasonably avoided. To this end, a
construction which will render every word operative is to be preferred over that
which would make some words idle and nugatory.
EQUITABLE PCI BANK,AIMEE YU AND BEJAN LIONEL APAS VS. NG
SHEUNG NGOR DOING BUSINESS UNDER THE NAME AND STYLE "KEN

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MARKETING," KEN APPLIANCE DIVISION, INC. AND BENJAMIN E. GO (G.R.
No. 171545, December 19, 2007)

Provision in the promissory note: If subject promissory note is extended, the

interest for subsequent extensions shall be at such rate as shall be determined
by the bank.

A contract of adhesion is a contract whereby almost all of its provisions are

drafted by one party. The participation of the other party is limited to affixing his
signature or his "adhesion" to the contract. For this reason, contracts of
adhesion are strictly construed against the party who drafted it.

It is erroneous, however, to conclude that contracts of adhesion are invalid per

se. They are, on the contrary, as binding as ordinary contracts. A party is in
reality free to accept or reject it. A contract of adhesion becomes void only when
the dominant party takes advantage of the weakness of the other party,
completely depriving the latter of the opportunity to bargain on equal footing.

That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But
they did not. Instead, they continuously availed of Equitable's credit facilities for
five long years.

Escalation clauses are not void per se. However, one "which grants the creditor
an unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the
agreement" is void. Clauses of that nature violate the principle of mutuality of
contracts. Article 1308 of the Civil Code holds that a contract must bind both
contracting parties; its validity or compliance cannot be left to the will of one of
them.

For this reason, we have consistently held that a valid escalation clause
provides:
1. that the rate of interest will only be increased if the applicable maximum
rate of interest is increased by law or by the Monetary Board; and

2. that the stipulated rate of interest will be reduced if the applicable

maximum rate of interest is reduced by law or by the Monetary Board (de-
escalation clause).

Equitable dictated the interest rates if the term (or period for repayment) of the
loan was extended. Respondents had no choice but to accept them. This was a
violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation
clause did not contain the necessary provisions for validity, that is, it neither
provided that the rate of interest would be increased only if allowed by law or the
Monetary Board, nor allowed de-escalation. For these reasons, the escalation
clause was void.

SPOUSES JUICO vs. CHINA BANKING CORPORATION (G.R. No. 187678,

April 10, 2013)

Spouses Ignacio F. Juico and Alice P. Juico (Spouses Juico) obtained a loan from
China Banking Corporation (China Bank) as evidenced by two Promissory Notes
both dated October 6, 1998 and numbered 507-001051-3 and 507-001052-0, for

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the sums of P6,216,000 and P4, 139,000, respectively. The loan was secured by
a Real Estate Mortgage (REM) over Spouses Juico’s property located at 49
Greensville St., White Plains, Quezon City covered by Transfer Certificate of Title
(TCT) No. RT-103568 (167394) PR-41208 of the Register of Deeds of Quezon
City. The two promissory notes signed by Spouses Juico provide:

“I/We hereby authorize the CHINA BANKING CORPORATION to

increase or decrease as the case may be, the interest rate/service
charge presently stipulated in this note without any advance notice
to me/us in the event a law or Central Bank regulation is passed or
promulgated by the Central Bank of the Philippines or appropriate
government entities, increasing or decreasing such interest rate or
service charge.”

When Spouses Juico failed to pay the monthly amortizations due, China Bank
demanded the full payment of the outstanding balance with accrued monthly
interests. On September 5, 2000, Spouses Juico received China Bank’s last
demand letter dated August 29, 2000.
As of February 23, 2001, the amount due on the two promissory notes totaled
P19,201,776.63 representing the principal, interests, penalties and attorney’s
fees. On the same day, the mortgaged property was sold at public auction, with
China Bank as highest bidder for the amount of P10,300,000.
On May 8, 2001, Spouses Juico received a demand letter dated May 2, 2001
from China Bank for the payment of P8,901,776.63, the amount of deficiency
after applying the proceeds of the foreclosure sale to the mortgage debt. As its
demand remained unheeded, China Bank filed a collection suit in the trial court.
In its Complaint, China Bank prayed that judgment be rendered ordering the
Spouses Juico to pay jointly and severally: (1) P8,901,776.63 representing the
amount of deficiency, plus interests at the legal rate, from February 23, 2001 until
fully paid; (2) an additional amount equivalent to 1/10 of 1% per day of the total
amount, until fully paid, as penalty; (3) an amount equivalent to 10% of the
foregoing amounts as attorney’s fees; and (4) expenses of litigation and costs of
suit.
In their Answer, Spouses Juico admitted the existence of the debt but interposed,
that the interest rates imposed by China Bank are not valid as they were not by
virtue of any law or Bangko Sentral ng Pilipinas (BSP) regulation or any
regulation that was passed by an appropriate government entity. They insist that
the interest rates were unilaterally imposed by the bank and thus violate the
principle of mutuality of contracts. They argue that the escalation clause in the
promissory notes does not give China Bank the unbridled authority to increase
the interest rate unilaterally. Any change must be mutually agreed upon.
The trial court found as valid the stipulation in the promissory notes that interest
will be based on the prevailing rate. It noted that the parties agreed on the
interest rate which was not unilaterally imposed by the bank but was the rate
offered daily by all commercial banks as approved by the Monetary Board.
Having signed the promissory notes, the trial court ruled that Spouses Juico are
bound by the stipulations contained therein.

HELD:
Escalation clauses are not basically wrong or legally objectionable as long as
they are not solely potestative but based on reasonable and valid grounds.

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Obviously, the fluctuation in the market rates is beyond the control of private
respondent.
In interpreting a contract, its provisions should not be read in isolation but in
relation to each other and in their entirety so as to render them effective, having
in mind the intention of the parties and the purpose to be achieved. The various
stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.
Here, the escalation clause in the promissory notes authorizing the respondent to
adjust the rate of interest on the basis of a law or regulation issued by the Central
Bank of the Philippines, should be read together with the statement after the first
paragraph where no rate of interest was fixed as it would be based on prevailing
market rates. While the latter is not strictly an escalation clause, its clear import
was that interest rates would vary as determined by prevailing market rates.
Evidently, the parties intended the interest on petitioners’ loan, including any
upward or downward adjustment, to be determined by the prevailing market rates
and not dictated by respondent’s policy. It may also be mentioned that since the
deregulation of bank rates in 1983, the Central Bank has shifted to a market-
oriented interest rate policy.
There is no indication that petitioners were coerced into agreeing with the
foregoing provisions of the promissory notes. In fact, petitioner Ignacio, a
physician engaged in the medical supply business, admitted having understood
his obligations before signing them. At no time did petitioners protest the new
rates imposed on their loan even when their property was foreclosed by
respondent.
This notwithstanding, we hold that the escalation clause is still void because it
grants respondent the power to impose an increased rate of interest without a
written notice to petitioners and their written consent. Respondent’s monthly
telephone calls to petitioners advising them of the prevailing interest rates would
not suffice. A detailed billing statement based on the new imposed interest with
corresponding computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision. An appropriate
form must also be signed by the petitioners to indicate their conformity to the new
rates. Compliance with these requisites is essential to preserve the mutuality of
contracts. For indeed, one-sided impositions do not have the force of law
between the parties, because such impositions are not based on the parties’
essential equality.
Modifications in the rate of interest for loans pursuant to an escalation clause
must be the result of an agreement between the parties. Unless such important
change in the contract terms is mutually agreed upon, it has no binding effect. In
the absence of consent on the part of the petitioners to the modifications in the
interest rates, the adjusted rates cannot bind them. Hence, we consider as
invalid the interest rates in excess of 15%, the rate charged for the first year.

 RELATIVITY

ARTICLE 1311. Contracts take effect only between the parties, their assigns
and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation or by provision of
law. The heir is not liable beyond the value of the property he received from the
decedent.

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If a contract should contain some stipulation in favor of a third person, he may
demand its fulfillment provided he communicated his acceptance to the obligor
before its revocation. A mere incidental benefit or interest of a person is not
sufficient. The contracting parties must have clearly and deliberately conferred a
favor upon a third person.

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